Unemployment and monetary policy in Switzerland

Peter Kugler,George Sheldon

doi:10.1007/bf03399301

Abstract

SummaryThis paper investigates the impact of the monetary policy change of the Swiss National Bank (SNB) in 1999 on the Swiss labor market on the basis of a Phillips relationship. Theoretical considerations as well as previous empirical work suggest that the SNB’s shift to a more inflation-targeted policy should have increased real-wage flexibility and lowered the NAIRU, the sacrifice ratio, and the level and persistence of inflation in Switzerland. Our results tend to confirm these expectations, although a number of the measured effects are not statistically significant.

Highlights

In 1999 the Swiss National Bank (SNB) changed its monetary policy from monetary targeting, which it had pursued since the breakdown of the Bretton Woods system, to inflation targeting (IT).1 According to the supporters of IT, such a policy shift should have had a number of positive effects in Switzerland, such as reduced and less persistent inflation as well as lower costs of disinflation, the socalled sacrifice ratio
Inflation is measured with respect to the same month of the previous year, and unemployment is given by the jobless rate
Our paper has investigated the effects of the introduction of IT in Switzerland on the level and persistence of inflation as well as on real-wage flexibility, the sacrifice ratio, and the non-accelerating inflation rate of unemployment (NAIRU) on the basis of a Phillips relationship

Summary

Introduction

In 1999 the Swiss National Bank (SNB) changed its monetary policy from monetary targeting, which it had pursued since the breakdown of the Bretton Woods system, to inflation targeting (IT). According to the supporters of IT, such a policy shift should have had a number of positive effects in Switzerland, such as reduced and less persistent inflation as well as lower costs of disinflation, the socalled sacrifice ratio. In 1999 the Swiss National Bank (SNB) changed its monetary policy from monetary targeting, which it had pursued since the breakdown of the Bretton Woods system, to inflation targeting (IT).. According to the supporters of IT, such a policy shift should have had a number of positive effects in Switzerland, such as reduced and less persistent inflation as well as lower costs of disinflation, the socalled sacrifice ratio. The aim of this paper is to investigate whether these and other effects discussed in the literature did arise in Switzerland after the adoption of IT. This allows us to present the first study that investigates the effects of adopting IT on the labor market, or on real-wage flexibility and the non-accelerating inflation rate of unemployment (NAIRU). Our paper addresses the criticism that estimates of the NAIRU are typically too imprecise (cf. Staiger et al, 1997, 2001) by using a two-equation model that combines an error-correction scheme with SUR estimation

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Results

Conclusion