THE SWISS NATIONAL BANK'S MONETARY POLICY IMPACT, INCLUDING PERSISTENTLY LOW INTEREST RATES, ON SWITZERLAND'S LONG-TERM RATES – A COMPARATIVE ANALYSIS WITH THE NETHERLANDS

Abstract

Switzerland’s low interest rate policy, set by the SNB, contrasts sharply with the inflation targeting monetary policy by the Netherlands under the ECB. This paper investigates the impact of these countries’ short-term policy rates on long-term bond yields, aiming to identify the differences in their responses. To do this, we analyze structural breaks during key economic events including the Global Financial Crisis, the Eurozone Crisis, and the SNB’s adoption of negative interest rates. We also conduct an evaluation of the differences in monetary policy transmission using vector autoregressions (VARs), Chow tests and IRF’s. The findings aim to provide insights into the effectiveness of low-rate policies versus inflation targeting in shaping economic stability and the dynamics of long-term interest rates.

Our results indicate that the transmission of short-term policy rate changes to long-term bond yields differs significantly between Switzerland and the Netherlands. In Switzerland, the SNB has kept the policy rate low and the response of 10-year bond yields was shown to be weaker and less consistent with the policy rate, largely since negative interest rates were introduced. In the Netherlands under the ECB's inflation-targeting framework, transmission is stronger and more stable. Besides policy rates, macroeconomic factors play a crucial role: Swiss yields react strongly to external risk and exchange rate volatility, while Dutch yields react more sensitively to Eurozone monetary policy and inflation expectations. These results suggest that while long-term yields impact to policy rates, macroeconomic conditions are the primary drivers of long-term interest rate behavior.