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Explanation & Answer
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Introduction
De-pegging of currency means removing the previously instituted peg on the currency (Shapiro &
Moles, 2014). The Swiss Franc was pegged against from 2011 to 2014. In 15 January 2015, the
Swiss National Bank (SNB) unexpectedly undertaken decision to de-peg the Swiss Franc. This depegging of the Swiss Franc caused to decline of the value of Swiss Franc substantially. There was
some reasons of the de-pegging decision of SNB. The Swiss exporters and other domestic firms
required to consider some hedging strategies to minimize the economic risk exposure created from
appreciation of Swiss Franc.
Reasons for De-Pegging of Franc
The de-pegging of a currency make a fixed exchange rate regime to a floating exchange rate regime
(Stonehill, Dunning, & Moffett, 2014). The possible reasons of the de-pegging of the Swiss Franc
by the Swiss National Bank (SNB) are provided below.
(a) Requirement to maintain lower currency reserve: De-pegging of Franc will require to maintain
lower amount of reserve by SNB than earlier. Pegged exchange rate system requires to maintain
large amount of currency reserve (to constantly buy and sell the foreign currency) (Stonehill,
Dunning, & Moffett, 2014). The problem with huge amount of currency reserve is the unwanted
inflation (Sercu, 2014). Switzerland has already accumulated huge amount of foreign-exchange
reserve (The Economist, 2015). This huge foreign-exchange reserve will eventually lead
hyperinflation in the Swiss economy.
(b) Introducing āquantitative easingā by Europe and the requirement to Print Paper money to
maintain peg: European Central Bank is expected to introduce āquantitative easingā to retire
government debts. Quantitative easing will push down the euro value (The Economist, 2015). In
that case, SNB will require to print more francs for maintaining the peg (Eun & Resnick, 2010).
(c) Discretion of exchange to promote export: Depreciation of the Euro caused depreciation of
Franc as well in 2014 (12% against US dollar and 10% against Indian Rupee) (The Economist,
2015). A cheaper Franc boosted exports to American and India. The policymakers have realized
the need of discretion in own monetary policy (The Economist, 2015).
(d) Allowing better focus on monetary policy and inflation: Pegging the Swiss Franc against Euro
means that the national monetary policy of Switzerland began to reflect the monetary policy of
Europe. The Switzerland needs to have interest rate that reflect that of Europe during the time of
pegging the Swiss Franc (Waugh, 2016). During internal recession, Switzerland may requi...