Discretionary Fiscal Policy: The Case of Switzerland

Abstract

Towards the end of 2009, the world economy was recovering from its deepest recession since the end of World War II. Most countries around the world took resort to fiscal policy in order to foster this recovery. In this paper, we first discuss the pros and cons of discretionary fiscal policy from a history of economic thought perspective. Next, we summarise the fiscal policy measures taken in Switzerland. Then we use simulations with the KOF macroeconomic model to assess the effects on the Swiss economy of a) the Swiss measures on the one hand and b) the fiscal stimulus packages taken by Switzerland’s most important trading partners on the other. The KOF September 2009 forecast, which incorporates the fiscal stimuli that were launched or in the pipeline at that time, serves as the baseline scenario. To assess the impacts of the fiscal stimulus packages in Switzerland and abroad, we re-run the KOF macroeconometric model counterfactually, modifying the variables pertaining to the domestic and the international economy respectively to represent a situation in which no fiscal action had been taken. We find that the spillover from the foreign efforts to curb the recession clearly dwarfs the effect from the domestic stimulus packages. This holds even if we re-sort to the extremely cautious scenario where external demand for Swiss exports derived from the weighted GDP of the most important importers is only 50% of what it would be in normal times. Hence we conclude that in addition to its own (rather limited) efforts to fight the recession, Switzer-land took a long free ride that by far exceeded the short one it paid for.