Driving forces of the Swiss output gap

Abstract

Summary What drives the output gap? Contrary to standard agnostic statistical approaches, New Keynesian small open economy models allow decomposing the output gap into its shocks and confirm the conventional wisdom that most of the variation is due to foreign shocks. However, the risk premium shock also plays an important role. It has a procyclical effect on the output gap except for the most recent recession, where the economic agents demanded a higher risk premium probably due to the large Swiss financial sector. This helped to dampen the recession because of the depreciation of the domestic currency due to this shock.

How do Individual Sectors Respond to Macroeconomic Shocks? A Structural Dynamic Factor Approach Applied to Swiss Data

“…rate. This identification is grounded in economic theory as the restrictions are consistent with the reaction to monetary policy and exchange rate shocks -the latter are usually labeled 'risk premium' shocks -in a dynamic stochastic general equilibrium model along the lines of Monacelli (2005) and fitted to Swiss data by Leist (2011) or Bäurle and Kaufmann (2014). Still, as already acknowledged by Uhlig (2005), the approach may not be sufficiently selective in the sense that other types of shocks may also satisfy the sign-restrictions.…”