The Effects of Foreign Shocks on Prices of Swiss Goods and Credit: An Analysis Based on VAR Methods

Abstract

This paper examines how external factors have influenced the evolution of prices and interest rates in Switzerland in the period from 1964 to 1981. The importance of the exchange-rate regime for both the degree of dependance of the Swiss economy on foreign shocks and the transmission mechanisms is studied in detail. The results show that by far the most important sources of shocks to Swiss wholesale prices and short-term interest rates are of foreign origin. The introduction of flexible exchange rates in 1973 does not alter this conclusion since it did not insulate the Swiss economy from foreign shocks to any significant extent. The mechanisms that transmit foreign shocks to the Swiss economy do seem to differ between the exchange rate regimes. These differences can be given interpre tions in terms of open economy macroeconomic models of the Mundell-Fleming variety.