Forex Intervention and Reserve Management in Switzerland and Israel since the Financial Crisis: Comparison and Policy Lessons

Abstract

This paper compares the appreciation pressures on the currencies of Switzerland and Israel, documents the similarities and differences between their methods of interventions and discusses their consequences for the size of forex reserve accumulation and their management. Differences in methods of intervention and in the magnitude of reserve accumulation are discussed within the larger context of differences in the monetary policies of the Swiss National Bank and of the Bank of Israel. The paper examines the pros and cons of forex interventions by small open economies faced with large trading partners whose policy rates are at or below the zero lower bound and who engage in quantitative easing. Conventional views about costs of intervention and the related accounting methods used to quantify them are evaluated and institutional changes designed to ameliorate the tradeoff between leaning against appreciations and “excessive” reserve accumulation are considered.