Question

Use the monetary model of exchange rates to answer the following questions.
The Swiss Central Bank currently targets its money growth rate to achieve policy objectives. Suppose Switzerland has output growth of 3 percent per annum and money growth of 8 percent per annum. What is Switzerland’s inflation rate in this case?
Describe how the Swiss Central Bank could use monetary policy to achieve a long-run inflation rate of 2 percent per annum.
Assuming the Swiss inflation rate derived in a.) above and further assume that the U.S. inflation rate is 2 percent per annum. What is the rate of nominal depreciation in the Swiss Franc relative to the U.S. dollar (ΔE₣/$/ E₣/$)?

Answer 1

Suppose Switzerland has output growth of 3 percent per annum and money growth of 8 percent per annum.
Switzerland’s inflation rate in this case is 8% - 3% = 5%.
The Swiss Central Bank could use contractionary monetary policy to achieve a long-run inflation rate of 2 percent per annum.
Assuming the Swiss inflation rate derived in a.) above and further assume that the U.S. inflation rate is 2 percent per annum. The rate of nominal depreciation in the Swiss Franc relative to the U.S. dollar is 8% - 2% = 6%.