Research

We extend the heteroskedasticity IV estimator of Rigobon and Sack (2004) to multiple monetary policy shocks by imposing recursive zero restrictions on the impact matrix. Unlike high-frequency identification, the approach requires neither intraday tick data nor precise announcement timestamps, making it applicable to countries and historical periods where such data are unavailable. Applied to US FOMC announcements, we find causal effects similar to those of high-frequency identification. The heteroskedasticity-based instrument passes weak-instrument tests for the target shock, whereas results are mixed for high-frequency surprises. For the path shock, we obtain strong instruments for the majority of specifications and the underlying shock series is highly correlated with the high-frequency counterpart.

Using newly collected discount rate data for six Swiss cities from 1846 to 1893, we find no evidence of increasing integration during a 30-year period of lightly regulated free banking. We attribute this to two structural issues: banks had incentives to ward off competitors by protecting their local monopolies or forming cartels, and there was always a risk (which varied across banks) that banknotes were not accepted or converted at par. We use a novel counterfactual to show that these issues increased discount rate dispersion, and argue that as a result, public regulation of payments infrastructure was necessary for money market integration.

We analyse the impact of interest-bearing central bank bills on financial market variables in Switzerland. The unique institutional setting allows us to identify the causal effects of two orthogonal shocks occurring on days with central bank bill auctions through heteroscedasticity: an overnight interest rate shock and a signalling shock. The first shock raises the overnight interest rate and modestly appreciates the exchange rate. The signalling shock appreciates the exchange rate more strongly. In addition, it lowers stock prices, long-term interest rates, as well as inflation expectations, and it raises corporate bond spreads. The signalling shock is economically more important for forward-looking variables than the overnight rate shock. The results suggest that liquidity-absorbing operations between official monetary policy decisions affect financial market variables by revealing information about the central bank’s future policy actions.

A previous version was titled 'Shocking interest rate floors'.

We study the causal effects of downward nominal wage rigidity after a deflationary monetary policy shock using Swiss data on employee-level contractual wages matched with income and employment from social security register data. We exploit the discontinuity around the origin of the wage growth distribution to compare the outcomes of individuals with wage freezes (treatment group) and small wage cuts (control group) before and after an unexpected decision by the Swiss National Bank leading to a 1% decline of the price level. Locally (that is, near the origin of the wage growth distribution), downward nominal wage rigidities cause a 4.4% decline in income and a 0.7 percentage point increase in the probability of unemployment. In the aggregate, income declines by 0.3% and the probability of unemployment increases by 0.05 percentage points.

Because macroeconomic data is published with a substantial delay, assessing the health of the economy during the rapidly evolving COVID-19 crisis is challenging. We develop a fever curve for the Swiss economy using publicly available daily financial market and news data. The indicator can be computed with a delay of 1 day. Moreover, it is highly correlated with macroeconomic data and survey indicators of Swiss economic activity. Therefore, it provides timely and reliable warning signals if the health of the economy takes a turn for the worse.

I estimate average economic activity during periods of inflation and deflation while accounting for measurement errors in 19th century prices. These measurement errors lead to underestimation (overestimation) of economic activity during periods of inflation (deflation). By exploiting multiple deflation indicators, it is possible to recover the true relationship; the shortfall of US industrial production growth during periods of deflation ranges from −4.5 pp to −7.6 pp, instead of −2 pp. I also find a negative relationship between deflation and real activity in the UK. I then examine the cross-country variation in the estimates for eleven countries. The patterns are consistent with stronger biases for countries with more serious measurement errors in prices.

We estimate a multivariate unobserved components stochastic volatility model to explain the dynamics of a panel of six exchange rates against the US dollar. The empirical model is based on the assumption that two countries’ monetary policy strategies may be well described by Taylor rules with a time-varying inflation target, a time-varying natural rate of unemployment, and interest rate smoothing. Compared to the existing literature, our model simultaneously provides estimates of the latent components included in a typical Taylor rule specification and the model-based real exchange rate. Our estimates closely track major movements along with important time series properties of real and nominal exchange rates across all currencies considered, outperforming a benchmark model that does not account for changes in trend inflation and trend unemployment. More precisely, the proposed approach improves on competing models in tracking the actual evolution of the real exchange rate in terms of simple correlations while it appreciably improves on simpler competitors in terms of matching the persistence of the real exchange rate.

The interaction of macroeconomic variables may change as nominal short-term interest rates approach zero. In this paper, we propose to capture these changing dynamics with a state-switching parameter model which explicitly takes into account that the interest rate might be constrained near the zero lower bound by using a Tobit model. The probability of state transitions is affected by the lagged level of the interest rate. The endogenous specification of the state indicator permits dynamic conditional forecasts of the state and the system variables. We use Bayesian methods to estimate the model and to derive the forecast densities. In an application to Swiss data, we evaluate state-dependent impulse-responses to a risk premium shock identified with sign-restrictions. We provide an estimate of the latent rate, i.e. the rate lower than the constraint on the interest rate level which would be state- and model-consistent. Additionally, we discuss scenario-based forecasts and evaluate the probability of exiting the ZLB region. In terms of log predictive scores and the Bayesian information criterion, the model outperforms a model substituting switching with stochastic volatility and another including intercept switching only combined with stochastic volatility.

I assess the stability of the monetary environment in Switzerland over the past two centuries. In order to control for transitory measurement errors, in particular in nineteenth century data, I use an unobserved-components stochastic-volatility model to extract the permanent trends from several nominal variables. The descriptive analysis of these trends suggests that the current monetary regime, flexible inflation targeting, provided a relatively stable monetary environment. Although the trends are quite stable for the nineteenth century, the estimates are imprecise. We should therefore be cautious when characterizing metal currency regimes as providing a stable monetary environment. A discussion of the results shows that the apparent success of flexible inflation targeting poses new challenges for the implementation of monetary policy because the trend decline in inflation was associated with a trend decline in nominal interest rates.

New Keynesian models with sticky prices make stark predictions about how the economy responds to shocks under different monetary policy regimes when short-term interest rates are constrained by an effective lower bound. We use the Swiss case as a laboratory to find evidence in favour of these predictions. We propose a Bayesian VAR to estimate impulse responses to risk shocks for short periods with a binding effective lower bound and with a publicly announced minimum exchange rate. In line with predictions from theory, we find that with a binding effective lower bound, the responses of the exchange rate, prices, and output become more persistent. However, the minimum exchange rate attenuates this adverse impact.

This paper investigates the information content of a large sectoral mixed-frequency business tendency survey for Switzerland relative to competing early available monthly information. Using a factor-augmented regression framework, we find that a broad set of dimensions of the survey provides additional information for explaining CPI inflation, employment growth and the output gap. However, the survey contains no additional information for GDP growth. A pseudo out-of-sample forecasting exercise suggests that the survey information is particularly useful for forecasting the medium-term CPI inflation.

This paper derives stylised facts on sectoral inflation dynamics and confronts these facts with two popular theoretical models of price setting. Based on sectoral price responses to macroeconomic shocks estimated from an approximate factor model, we find that the frequency of price changes explains a relevant share of the cross-sectional variation of the speed and size of responses. Moreover, there is little evidence that the volatility of sectoral inflation due to idiosyncratic shocks dampens the size and speed of the responses to macroeconomic shocks. These findings support a multi-sector model with sticky prices rather than a rational-inattention model. We derive the results from different modelling and sampling decisions proposed in the literature, and we find that the explanatory power of the frequency of price changes for the speed of response to a macroeconomic shock proves robust in the face of these decisions. Other results are sensitive with respect to the choice of the factor model and the treatment of outliers..

This study documents the SNB's ARIMA model based on disaggregated CPI data used to produce inflation forecasts over the short-term horizon, and evaluates its forecasting performance. Our findings suggest that the disaggregate ARIMA model for the Swiss CPI performed better than relevant benchmarks. In particular, estimating ARIMA models for individual CPI expenditure items and aggregating the forecasts from these models gives better results than directly applying the ARIMA methodto the total CPI. We then extend the model to factor in changes in the collection frequency of the Swiss CPI data and show that this extension further improves the forecasting performance.

In this paper, we follow the recent empirical literature that has specified reduced-form models for price setting that are closely tied to (S, s)-pricing rules. Our contribution to the literature is twofold. First, we propose an estimator that relaxes distributional assumptions on the unobserved heterogeneity. Second, we use the estimator to examine the prevalence of positive price changes in a low-inflation environment. Our model estimates suggest that, if inflation falls from 0.9% to zero, the share of positive price changes in all price changes falls from 63.6% to 56.2%.

This paper estimates the response of consumer prices to a monetary policy shock in Switzerland. We find that there is no evidence of a price puzzle at the aggregate level. This is because our factor-augmented vector autoregression (FAVAR) avoids misspecification by including more information than a traditional VAR. However, the response is still delayed by at least four quarters, partly because there is a price puzzle in some sectors. In particular, rents tend to rise after a monetary policy tightening because there are legal provisions in Switzerland which link them to interest rates. But durable goods prices also rise, which is consistent with the existence of a cost channel of monetary policy.

This paper investigates price-setting behaviour of firms based on the individual price quotes underlying the Swiss consumer price index. The data set covers the years from 1993 to 2005. Six main findings emerge from the analysis. (i) Prices are sticky; the median duration amounts to 4.6 quarters. (ii) Price-setting behaviour is heterogeneous across sectors and outlet characteristics. (iii) Price changes are sizeable; the median absolute size amounts to 9.4%. (iv) There is little evidence of downward price stickiness; almost half of all price changes are decreases. An exception is the service sector, however, where there is evidence of asymmetries in price-setting due to downward rigid wages. (v) Firms respond to expected cost shocks at the date of their occurrence; VAT rate changes do not lead to more price adjustments before they take effect. (vi) There is some evidence that firms adjust their behaviour according to the state of the economy; in particular, firms facing higher rates of inflation adjust prices more frequently.

We propose a two-step approach to measure monetary policy shocks based on daily financial market data. First, we estimate the causal impact of a monetary policy shock on financial market variables using standard instrumental variables techniques (high-frequency and heteroskedasticity-based identification). Second, we exploit the cross-sectional variation of the causal impact to predict the underlying unobserved monetary policy shocks based on the Kalman filter. The two-step approach delivers a more accurate measure of monetary policy shocks. As a consequence, various anomalies documented in the literature on measuring monetary policy shocks are alleviated or resolved.

We examine the properties of monetary policy shocks identified via heteroskedasticity- and proxy-IV.

We study domestic and international drivers of long-term interest rates using newly compiled financial market data for Switzerland starting in 1852. We use a time-varying parameter vector autoregressive model to estimate long-term trends in nominal interest rates, exchange rate growth, and inflation. We then decompose the Swiss long-term interest rate trend into various drivers using an interest rate accounting framework. The decline in long-term interest rates since 1970 is mainly driven by a decline in the level of inflation. Comparing Switzerland with the rest of the world, we show that while Swiss real interest rates were higher during the 19th century, the pattern reversed after World War 2 with Swiss nominal and real rates becoming lower than foreign ones. However, this Swiss “low interest rate island” has disappeared in recent years. We document a connection between inflation risk and the Swiss term spread, as well between relative inflation risk and the difference between Swiss and foreign real interest rates.

Previously titled 'What drives long-term interest rates? Evidence from the entire Swiss franc history 1852–2020'.

We use novel price data to investigate whether inflation dynamics changed after the introduction of a common currency.

We use natural language processing to measure business cycle fluctuations since the foundation of the modern Swiss Confederation.

This paper identifies the effect of variation in government-backed loan supply on unemployment exploiting regional variation in the Swiss COVID-19 lending program. The rules of the program introduce variation in loan supply across Cantons. This variation helps disentangling supply from demand effects. Higher loan supply reduces unemployment. Increasing the volume by CHF 100,000 saves between 0.22 and 0.29 jobs. Therefore, loan supply has to expand by between CHF 344,800 and CHF 454,500 to save one job. Taking into account that some of the borrowers default, saving one job costs the government between CHF 39,700 and CHF 52,400 per year. These costs are somewhat lower than unemployment benefits associated with the median income.

We analyze export price adjustment of Swiss manufacturing firms using a novel data set of matched export, import, and domestic prices. After a large, unexpected, and permanent appreciation of the Swiss franc, export prices set in domestic currency fell less than export prices set in foreign currency. This difference prevails if we control for variation in firms' marginal cost. Through the lens of a structural model, this difference can be traced back to strategic complementarity in price setting for firms pricing in foreign currency. Meanwhile, firms setting prices in domestic currency exhibit no strategic complementarity and follow a constant markup-pricing rule.

Tools for identifying structural shocks using heteroskedasticity- and proxy-based instrumental variable (IV) methods in event-study settings. Supports local projection impulse response estimation, generalised weak instrument testing, recursive heteroskedasticity-IV identification, and Kalman-filter shock extraction.

This report documents the use and misuse of generative artificial intelligence in academic economic research and provides guidelines for university students and instructors. It primarily addresses students and instructors in a master's program in economics; however, the use cases and guidelines may be useful in other fields and academic research in general.

This evaluation, conducted by FORS in collaboration with IRENE, examined possible design features for the future compilation of the Swiss Consumer Sentiment Index. The way consumer sentiment is calculated in Switzerland is well in line with similar measures elsewhere, but Switzerland is the only country under review collecting data only quarterly, which severely limits the information available for business cycle monitoring. Assuming at least a monthly index is to be calculated, the report recommends a weekly rolling cross-section design with 500 weekly target interviews, a single-mode web-only survey with offline recruitment, and model-based retropolation to extend the monthly indicator back in time.

We measure the labor market outcomes of employees with downward rigid base wages after an unexpected deflationary shock in Switzerland using a firm survey matched with Social Security register data. The employees that additionally receive downward flexible compensation, such as bonuses, are less likely to lose their job after a deflationary shock than those only receiving a base wage. Only a modest share of employees receives downward flexible compensation, however. Therefore, these compensation schemes do not offset the overall allocative effects of downward rigid base wages.

I simulate the distribution of SNB profits to the Confederation and Cantons under a hypothetical scenario, in which the new agreement between the Swiss National Bank and the Federal Department of Finance would have been in place from 2005-2019. All else equal, the new agreement leads to: (i) a higher average profit distribution; (ii) larger annual fluctuations of profit distributions, complicating fiscal authorities' budget planning; (iii) pro-cyclical profit distributions (lower [higher] during economic recessions [booms]). Having said that, the SNB's profit distributions account for a relatively modest share of total government expenditures. In addition, to offset the volatile and pro-cyclical profit distributions, fiscal authorities may borrow on capital markets.

The large structural decline in real interest rates constrains policymakers, notably central banks' scope to cut rates in recessions. We place this decline in historical perspective for Switzerland, constructing quarterly data back to 1852 from novel archival sources and extracting long-term trends for interest rates, inflation, and exchange-rate growth. Nominal rates have reached historical lows since the Global Financial Crisis, driven by lower trend inflation and falling foreign rates. Our econometric analysis links the Swiss real rate to global drivers and demographics: a larger elderly population share lowers it. The postwar "interest rate island" has vanished; however, there is little evidence that long-term real interest rate trends in Switzerland will substantially increase in the near future.

Diese Studie zeigt wie sich ein vorzeitiger Ausstieg aus der Tiefzinspolitik auf den Wechselkurs und die schweizerische Wirtschaft auswirken würde. Ein überraschender Ausstieg aus der Tiefzinspolitik würde den Schweizer Franken um 3-7% aufwerten. Zudem würde dies zu einem Rückgang der Wirtschaftsaktivität und der Konsumentenpreise führen. Es gibt jedoch alternative geldpolitische Strategien, die den Franken schwächen und die Nominalzinsen erhöhen. Dies würde eine höhere Inflationsrate erfordern.

What is the impact of a permanent nominal appreciation on manufacturing prices and employment? To answer this question this study exploits the unexpected 10% appreciation in the aftermath of the removal of the Swiss National Bank's exchange rate floor in January 2015. Prices of products sold by domestic firms, as well as export prices set in domestic currency, declined only slightly. By contrast, export prices denominated in euro and prices of imported products changed more quickly and more strongly (measured in Swiss francs). We show that sticky prices in the corresponding currency of pricing are one reason for this pattern, supporting modeling assumptions in the New Keynesian tradition. These missing price adjustments therefore can be responsible why nominal exchange rate fluctuations affect the real economy. In line with this idea, we find that manufacturing employment has declined significantly after the appreciation. Relative to a control group of similar Austrian firms, employment in an average Swiss manufacturing firm declined by 4% two years after the appreciation.

Study on behalf of the State Secretariat for Economic Affairs SECO, Strukturberichterstattung 56/4.