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The franc shock and Swiss GDP: how long does it take to start feeling the pain?

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  • Boriss Siliverstovs

Abstract

The article addresses the question on what is the typical time horizon over which a full transmission of movements in the real exchange rate takes place into real economy. We base our analysis on the mixed-frequency small-scale dynamic factor model (DFM) proposed by Siliverstovs in 2012 fitted to the Swiss data. In this article, we augment the benchmark model with the real exchange rate of the Swiss franc vis-a-vis currencies of its 24 trading partners, while keeping the rest of model specification intact. We are interested in investigating the relationship between the common latent factor, representing the Swiss business cycle, and the real exchange rate. We explore the temporal relationship between these two variables by varying the time lag with which the real exchange rate enters the factor model by recording the magnitude and statistical significance of the factor loading coefficient in the equation pertaining to the real exchange rate variable. Our main conclusion is that the fluctuations in the exchange rate start influencing real economy after 1 month and their effect is practically over after 13 months. The largest effect is recorded at the time horizon of about 6 to 9 months.

Suggested Citation

  • Boriss Siliverstovs, 2016. "The franc shock and Swiss GDP: how long does it take to start feeling the pain?," Applied Economics, Taylor & Francis Journals, vol. 48(36), pages 3432-3441, August.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:36:p:3432-3441
    DOI: 10.1080/00036846.2016.1139678
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    Cited by:

    1. Andreas Brunhart & Martin Geiger, 2025. "Sectoral effects of exchange rate shocks: goods exports and the appreciation of the Swiss Franc in 2015," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 161(1), pages 1-25, December.
    2. Buchholz, Manuel & von Schweinitz, Gregor & Tonzer, Lena, 2018. "Did the Swiss exchange rate shock shock the market?," IWH Discussion Papers 9/2018, Halle Institute for Economic Research (IWH).
    3. Peter Bernholz & Ernst Baltensperger & David Iselin & Oliver Landmann & Rudolf Minsch, 2015. "Der »Franken-Schock«: Die Freigabe des Schweizer Franken –wer gewinnt und wer verliert?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 68(05), pages 03-19, March.
    4. Gregor von Schweinitz & Lena Tonzer & Manuel Buchholz, 2021. "Monetary policy through exchange rate pegs: The removal of the Swiss franc‐Euro floor and stock price reactions," International Review of Finance, International Review of Finance Ltd., vol. 21(4), pages 1382-1406, December.
    5. Siliverstovs, Boriss, 2017. "Dissecting models' forecasting performance," Economic Modelling, Elsevier, vol. 67(C), pages 294-299.

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