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Modeling Monetary Transmission in Switzerland with a Structural Cointegrated VAR Model

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  • Katrin Assenmacher-Wesche

Abstract

This paper examines the transmission of monetary policy in Switzerland using a structural vector error correction model (SVECM) that includes real money, real output, a long and short-term interest rate, inflation and the exchange rate as endogenous variables; and a foreign interest rate and oil prices as exogenous variables. The SVECM takes account of five cointegrating relations that are interpreted as capturing money demand, the real interest rate, the term spread, uncovered interest parity and an aggregate-demand schedule. After identifying a monetary policy shock, the model is used for impulse-response analysis. We find that including money in the model eliminates the price puzzle often found in the VAR literature. Moreover, it produces monetary policy shocks that are about three times smaller and much less persistent as in versions of the model without money. In addition, the long-run structure imposed by cointegration leads to a quicker return to equilibrium after a shock.

Suggested Citation

  • Katrin Assenmacher-Wesche, 2008. "Modeling Monetary Transmission in Switzerland with a Structural Cointegrated VAR Model," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 144(II), pages 197-246, June.
  • Handle: RePEc:ses:arsjes:2008-ii-3
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    Cited by:

    1. Gregor Bäurle & Daniel Kaufmann, 2014. "Exchange rate and price dynamics in a small open economy - the role of the zero lower bound and monetary policy regimes," Working Papers 2014-10, Swiss National Bank.
    2. Gebhard Kirchgässner & Jürgen Wolters, 2010. "The Role of Monetary Aggregates in the Policy Analysis of the Swiss National Bank," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 146(I), pages 221-253, March.
    3. Georgiadis, Georgios & Jančoková, Martina, 2017. "Financial globalisation, monetary policy spillovers and macro-modelling: tales from 1001 shocks," Working Paper Series 2082, European Central Bank.
    4. Daniel Kaufmann & Sarah Lein, 2011. "Sectoral Inflation Dynamics, Idiosyncratic Shocks and Monetary Policy," Working Papers 2011-07, Swiss National Bank.
    5. Daniel Kaufmann & Sarah M. Lein, 2012. "Is There a Swiss Price Puzzle?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 148(I), pages 57-75, March.

    More about this item

    Keywords

    Monetary transmission; structural vector error correction model;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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