##lationary risks. the critique does not take these three points into account. structural factors and switzerland ’ s surplus let me first address the question of specific structural factors in the swiss current account surplus, and why this surplus is not a reflection of swiss franc weakness. in a nutshell, these factors are more closely correlated with external developments in real economic activity than with exchange rate movements. i ’ d like to highlight these structural factors with the help of three figures. figure 2 shows the current account surplus and the real trade - weighted exchange rate of the swiss franc. i have two observations here : in the short run, when the franc appreciates in real terms, the surplus in the current account does not automatically decline. nor does the surplus automatically increase when the franc depreciates. in the long run, both the real exchange rate and the surplus increase over time. thus, the theory that a stronger real swiss franc automatically leads to a lower current account surplus does not hold empirically for switzerland. why is this? let ’ s look at figure 3, which shows the trade account and current account balances for selected countries. if a country ’ s current account surplus is primarily determined by its trade account in goods, then we might expect an appreciation to result in a smaller surplus, through lower exports and higher imports. the underlying assumption in many economic models is that current account adjustment comes about primarily through the trade - in - goods component. switzerland is different to most other countries, in that its trade account balance in goods represents only a small fraction of the large current account surplus. this stands in stark contrast to other economies such as china, where goods trade makes up more than 80 % of the current account surplus. so, if the swiss current account is not driven by the trade balance in goods, then what are the factors responsible for its surplus? as we can see from figure 4, the large surplus in the see, for example, joseph e. gagnon ( 2013 ) : “ the elephant hiding in the room : currency intervention and trade imbalances ”, working paper series wp13 - 2, peterson institute for international economics. bis central bankers ’ speeches current account is mainly attributable to two components : investment income and services. the figure shows just the net amounts for these components. in switzerland, there is close co - movement between investment income and current account balances. historically, surpluses have been the norm for switzerland. our current account has

situation. i have also argued that, historically, an appreciation of the swiss franc has not led to a reduction in switzerland ’ s current account. yet this disconnect between the exchange rate and the current account balance does not diminish the exchange rate ’ s importance for the swiss economy. given the high degree of openness of our economy, the exchange rate – next to the interest rate – is the key definer of monetary conditions and thus has a strong impact on both prices and production. the swiss economy has shown in the past that it can handle volatility and appreciation in the real exchange rate when these are based on fundamentals. however, excessive and abrupt appreciations driven by financial market turmoil have a disruptive impact on prices and production, resulting in deflation and recession. what, in practical terms, does this mean for the snb ’ s monetary policy? it means that we do not gear our monetary policy to the current account. the current account is not an indicator of swiss capacity utilization ; in particular, it is not an indicator of price stability. consequently, the snb has no target – and indeed should not have a target – for the current account. rather, we need to take both the inflation outlook and capacity utilization into consideration, and must provide adequate monetary conditions in order to fulfill our mandate. despite recent turbulence on foreign exchange markets in emerging economies, the swiss franc has settled against the euro since september 2012 at slightly above the minimum exchange rate of 1. 20. accordingly, the snb did not have to enforce the minimum exchange rate for over a year now. yet the risks in the world economy are still to the downside and the swiss franc is still high. therefore, the snb is maintaining the minimum exchange rate. it is the right tool for ensuring price stability in switzerland in the foreseeable future. with short - term interest rates close to zero, the minimum exchange rate can prevent an undesirable tightening of monetary conditions in the event that upward pressure on the swiss franc should intensify once again. thus, as reiterated in our september monetary policy assessment, the snb stands ready to enforce the minimum exchange rate and take further measures as required. source : u. s. department of the treasury. bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches