9,272 Economics of Central Banking

Empirical Evidence for Switzerland

Nicolas A. Cuche-Curti
Fall Term 2012

KEITH CARRON 12602421

OCTOBER 27th 2012

1. INTERNATIONAL LONG-RUN MONETARY RELATIONSHIPS

From our analysis of the sample data, we can conclude that there is very little correlation between growth in GDP and
growth in the money supply (MB or M3). We can see that changes to the supply of money do not alter the growth of the
economy as a whole.

The data reveals a strong, positive correlation between inflation and growth the money supply. Correlation is 0.8244 (
v MB) and 0.8559 ( v M3), consistent with the quantity theory of money which states that money supply has a
proportional relationship with the price level (M*V = P*Y).
As we can see in all cases, the choice of money stock has little effect on the outcome.

12602421

Keith Carron MBF

2. DYNAMIC SHORT-RUN CORRELATIONS IN SWITZERLAND

(A)

From analysing the cross correlations between Swiss GDP q-o-q annualised growth rates and the growth rates of the
four monetary aggregates, we see different dynamics for Switzerland than those of the United States as presented by
Walsh (2010). This reflects the fact that private agents in different countries respond differently to economic
disturbances and indeed so do the monetary authorities of the different countries (Walsh, C., 2010). All four aggregates
are positively correlated at lags and negatively correlated at leads. This positive correlation at lags indicates that
changes in the money aggregates leads to changes in output i.e. increases in money supply leads to increases in GDP.
Growth in GDP tends to be followed by negative growth in the monetary aggregates, though this converges to zero 8
quarters out for M1, M2, and M3.

12602421

Keith Carron MBF

(B)

Cross correlations between GDP q-o-q growth rates and interest rates, both long and short term, are similar, though the
correlation with long-term interest rates is less pronounced. Low interest rates tend to lead to increased output and
high output is followed by higher interest rates, which conforms to intuition (low interest rates leads to increased
investment and consumption and high levels of growth are likely to lead to contractionary monetary policy). Likewise
low levels of inflation lead growth (no shoe leather costs, menu costs, or unpredictability costs) and high levels of
inflation follow growth (excess demand), also intuitive.

12602421

Keith Carron MBF

-.2

3. VECTOR AUTOREGRESSIONS WITH SWISS DATA

-.4

(A)

-.6
1

Response to Cholesky One S.D. Innovations 2 S.E.

Response of GDP_Y to I3M

10

10

10

Response of CPI_Y to I3M

.4

.3

.2

.2
.0

.1
-.2

.0

-.4
-.6
1

10

-.1
1

Response of CPI_Y to I3M

.6

.2

.4

.1

.2

.0

.0

-.1
2

Response of I3M to I3M

.3

10

-.2
1

Short term interest Response

rates was the
monetary
of I3M
to I3M policy instrument of choice given that the SNB targets the 3M Swiss Libor
.6
and that
the quantity theory of money indicates that changes in aggregate money supply do not affect the real

economy. The endogenous variables chosen were GDP y-o-y growth rates, CPI yearly changes, and 3 month interest
.4

rates. The optimal lag was found to be 2 quarters based on Schwarz and Akaike criteria. The ordering of the variables
was GDP_Y,
CPI_Y, and then I3M. For the regression output see Appendix A.
.2
Studying
the IRFs we can see that a monetary shock leads to an increase in GDP for the first year, which does not follow
.0
intuition. We would expect GDP to drop following an interest rate hike as investment and consumer spending dropped.
-.2
However,
we do see the effects after the first year when GDP growth becomes negative. Perhaps we can explain this by
1

10

assuming a one year time lag for monetary policy to have an effect on GDP growth.
Looking at the response of the CPI we can see a positive response of prices to the contractionary monetary policy,
known as the price puzzle. We would expect inflation to drop following the increase in interest rates so this graph seems
to be in the wrong direction.
Finally, we can see an increase in the short term interest rates leads to further increases before levelling off. We could
explain this by assuming that one increase in interest rates is likely to be followed by another until the threat of inflation
has been eliminated.
12602421

Keith Carron MBF

(B)
Response to Cholesky One S.D. Innovations 2 S.E.
Response of GDP_Y to I3M

Response of CPI_Y to I3M

.3

.2

.2
.1

.1

.0
-.1

.0

-.2
-.3

-.1

-.4
1

10

Response of I3M to I3M

10

10

Response of COMMOODYS to I3M

.4

100

.3

.2

-100

.1

-200

.0

-300

-.1

-400
1

10

Adding the commodities price index as an endogenous variable alters both the GDP IRF and the CPI IRF. The I3M IRF
remains largely unchanged. In the case of the GDP IRF, the contractionary policy begins having effects after 2 quarters
rather than 4. The pricing puzzle is also not as pronounced in the CPI IRF. For the regression output see Appendix B.
Looking at the response of the commodities price index we see a large drop following an increase in short term interest
rates. This follows intuition as the increasing interest rates increases current extraction rates, decreases the
attractiveness of carrying inventories, causes a shift of capital into bonds, and causes an appreciation of the domestic
currency making commodity imports cheaper.

12602421

Keith Carron MBF

4. APPENDIX REGRESSION OUTPUT

(A) FIRST REGRESSION - GDP_Y CPI_Y I3M
Vector Autoregression Estimates
Date: 10/21/12 Time: 16:40
Sample: 1995Q1 2011Q4
Included observations: 68
Standard errors in ( ) & t-statistics in [ ]
GDP_Y

CPI_Y

I3M

GDP_Y(-1)

1.262137
(0.11721)
[ 10.7685]

0.198642
(0.06801)
[ 2.92078]

0.185028
(0.05308)
[ 3.48589]

GDP_Y(-2)

-0.516682
(0.10950)
[-4.71852]

-0.171645
(0.06354)
[-2.70142]

-0.107501
(0.04959)
[-2.16781]

CPI_Y(-1)

-0.096221
(0.19776)
[-0.48656]

0.969013
(0.11475)
[ 8.44442]

-0.068534
(0.08956)
[-0.76523]

CPI_Y(-2)

-0.094276
(0.19741)
[-0.47756]

-0.390881
(0.11455)
[-3.41232]

0.012590
(0.08940)
[ 0.14082]

I3M(-1)

0.361754
(0.29976)
[ 1.20679]

0.094734
(0.17394)
[ 0.54463]

1.071097
(0.13575)
[ 7.88995]

I3M(-2)

-0.419932
(0.29181)
[-1.43905]

0.065685
(0.16933)
[ 0.38792]

-0.142868
(0.13215)
[-1.08108]

0.716138
(0.18347)
[ 3.90324]

0.045016
(0.10646)
[ 0.42284]

-0.023685
(0.08309)
[-0.28506]

0.849802
0.835029
27.92028
0.676542
57.52188
-66.22258
2.153605
2.382084
1.721472
1.665677

0.742815
0.717519
9.400811
0.392571
29.36396
-29.21162
1.065048
1.293526
0.848543
0.738623

0.925746
0.918443
5.726209
0.306386
126.7514
-12.35638
0.569305
0.797784
1.523264
1.072846

R-squared
Adj. R-squared
Sum sq. resids
S.E. equation
F-statistic
Log likelihood
Akaike AIC
Schwarz SC
Mean dependent
S.D. dependent

Determinant resid covariance (dof adj.)

Determinant resid covariance
Log likelihood
Akaike information criterion
Schwarz criterion

0.005704
0.004118
-102.7208
3.638846
4.324282

12602421

Keith Carron MBF

(B) SECOND REGRESSION - GDP_Y CPI_Y I3M COMMOODYS

Vector Autoregression Estimates
Date: 10/21/12 Time: 19:38
Sample: 1995Q1 2011Q4
Included observations: 68
Standard errors in ( ) & t-statistics in [ ]
GDP_Y

CPI_Y

I3M

COMMOODYS

GDP_Y(-1)

1.223829
(0.11594)
[ 10.5560]

0.173569
(0.06628)
[ 2.61866]

0.161820
(0.05058)
[ 3.19921]

30.31816
(37.8263)
[ 0.80151]

GDP_Y(-2)

-0.452594
(0.11158)
[-4.05619]

-0.136176
(0.06379)
[-2.13471]

-0.065622
(0.04868)
[-1.34800]

-7.283374
(36.4050)
[-0.20007]

CPI_Y(-1)

-0.120589
(0.19531)
[-0.61743]

0.941301
(0.11166)
[ 8.43023]

-0.077748
(0.08521)
[-0.91244]

-166.9989
(63.7219)
[-2.62074]

CPI_Y(-2)

0.011620
(0.20174)
[ 0.05760]

-0.307086
(0.11534)
[-2.66251]

0.069911
(0.08802)
[ 0.79429]

118.9459
(65.8217)
[ 1.80709]

I3M(-1)

0.220856
(0.30152)
[ 0.73247]

0.018837
(0.17238)
[ 0.10928]

0.978042
(0.13155)
[ 7.43481]

-174.1322
(98.3767)
[-1.77005]

I3M(-2)

-0.323844
(0.28891)
[-1.12091]

0.132634
(0.16517)
[ 0.80301]

-0.086571
(0.12605)
[-0.68682]

153.1021
(94.2616)
[ 1.62423]

COMMOODYS(-1)

0.000783
(0.00041)
[ 1.91105]

0.000598
(0.00023)
[ 2.55178]

0.000434
(0.00018)
[ 2.42873]

1.657757
(0.13375)
[ 12.3948]

COMMOODYS(-2)

-0.000897
(0.00044)
[-2.04976]

-0.000648
(0.00025)
[-2.59203]

-0.000514
(0.00019)
[-2.69461]

-0.690842
(0.14274)
[-4.83993]

0.868046
(0.25994)
[ 3.33943]

0.057634
(0.14861)
[ 0.38782]

0.109283
(0.11341)
[ 0.96364]

119.5035
(84.8089)
[ 1.40909]

0.861103
0.842269
25.81963
0.661529
45.72182
-63.56315
2.134210
2.427969
1.721472
1.665677

0.769128
0.737823
8.439023
0.378199
24.56907
-25.54202
1.015942
1.309700
0.848543
0.738623

0.936271
0.927630
4.914546
0.288613
108.3503
-7.159334
0.475275
0.769033
1.523264
1.072846

0.983731
0.981525
2748480.
215.8342
445.9346
-457.1275
13.70963
14.00339
2494.001
1587.908

R-squared
Adj. R-squared
Sum sq. resids
S.E. equation
F-statistic
Log likelihood
Akaike AIC
Schwarz SC
Mean dependent
S.D. dependent

Determinant resid covariance (dof adj.)

Determinant resid covariance
Log likelihood
Akaike information criterion
Schwarz criterion

211.9932
120.1418
-548.7662
17.19900
18.37404

12602421

Keith Carron MBF