Discussion of “Unemployment and Monetary Policy in Switzerland” by Peter Kugler and George Sheldon

Marc P Giannoni

doi:10.1007/bf03399302

Abstract

Discussion of “Unemployment and Monetary Policy in Switzerland” by Peter Kugler and George Sheldon

Highlights

In December 1999, the Swiss National Bank (SNB) introduced a new monetary policy strategy involving a formal definition of “price stability”, the publication of inflation forecasts, and the announcement of a target range for the threemonths swiss franc Libor (e.g., Jordan, Peytrignet and Rossi, 2010)
The paper sets up ambitious goals because it is a priori difficult to detect a clear effect of a policy change in 1999 on the inflation-unemployment relationship in Switzerland, as suggested by Figure 1
While the new monetary policy strategy appears to have been successful at maintaining a low inflation-unemployment tradeoff, it is not clear from the figure that it contributed to a change in the inflationunemployment relationship

Summary

The Triple Duty of λ

All three of these results rely on an increase in the estimate of a single parameter, λ, which in the “Battle-of-the-markups” model measures the degree to which workers (firms) are willing to back down from wage (price) demands in face of rising unemployment (falling sales). Imposing some structure on the data process is necessary to infer any effect of the policy change. The framework considered does not allow the authors to clearly identify effects of changes in monetary policy strategy. Even if one took the increase in the estimate of λ at face value, there is no guarantee that it is caused by the change in monetary policy strategy. Identifying a change in λ after 1999 does not guarantee that one captures the effects of a change in the monetary policy regime, unless one imposes more structure on the model considered, or unless one brings more data (on wages, interest rates, measures of expectations, etc) to bear

Policy Change and Expectations

Monetary Policy and the Unemployment Gap

Conclusion