APPENDIX: The Range of the Federal Budget Balance Under the Expenditure Rule
52. Rearranging the expenditure rule to solve for the implied government deficit ratio (GDR) gives:
53. The most basic scenario assumes that revenues and the cyclical factor are predicted without
54. However, estimates of
55. Abstracting from the annual adjustment payments, the maximum permissible deficit in a severe and unforeseen downswing would be 1.55 percent of GDP. The error correction mechanism of the expenditure rule stipulates that large forecast errors must be corrected in particular if the accumulated overspending amounts to more than 6 percent of expenditures. A forecast error of 10 percent would likely lead to an immediate violation of the deficit limit and require an adjustment of the spending ceiling via a negative
Alesina A. and R. Perotti, 1997, “Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects,” IMF Staff Papers, Vol. 44, No. 2, pp. 210–248.
Aiyagari, S. Rao and Ellen R. McGrattan, 1998, “The Optimum Quantity of Debt,” Journal of Monetary Economics, No. 42, pp. 447–69.
European Observatory on Health Care Systems, 2000, “Health Care Systems in Transition—Switzerland,” World Health Organization, Denmark.
Feld L. P. and G. Kirchgässner, 2000, “The Political Economy of Direct Legislation: An Analysis of its Impact on Budgetary Policy,” Working Paper, University of St. Gallen.
Hemming R. and M. Kell, 2001, “Promoting Fiscal Responsibility – Transparency, Rules and Independent Fiscal Authorities,” Working Paper, International Monetary Fund.
Heeringa W. and Y. Lindh, 2001, “Dutch versus Swedish Budgetary Rules: Comparison and Stabilizing Properties,” Paper prepared for the Banca d’italia Workshop on Fiscal Rules, February 2001 Rome.
OECD, Annual Review, 2000, Switzerland 2000–2001, Paris.
Prepared by Stephan Danninger.
The Maastricht Treaty introduced a euro area membership requirement of a maximum deficit of 3 percent of GDP and a 60 percent debt-to-GDP ratio.
Between 1993 and 1997 the federal government paid a net SwF 4.3 billion (1.1 percent of GDP) into the unemployment insurance fund. A similar amount was provided by the cantons.
The HP-filter is a widely used method for decomposing time series data into a trend and a cyclical component. It has the advantage of providing a transparent and objective measure of potential output. However, the authorities are open to alternative approaches if a superior method for calculating the output gap can be found.
The balance of the fictional account is determined as the accumulated difference between revenue and expenditures deviations minus discrete adjustments At at any prior year. The overall balance is given as:
The qualified majority requirement is waived if the proposed expenditures exceed the ceiling by less than 0.5 percent.
Deficit and debt objectives are unequivocally linked through the flow-stock identity that fiscal deficits are equal to changes in the debt level.
The Stability and Growth Pact was adopted in 1997 and is geared towards fiscal discipline among the member countries of the European Monetary Union.
The debt ceiling for European Monetary Union was set at 60 percent of GDP. While this level serves as a reference value for a sustainable fiscal position with a steady state budget deficit of 3 percent and a nominal GDP growth rate of 5 percent, the EU has never officially referred to the 60 percent ceiling as an optimal level of public debt.
The authorities project AHV expenditures to increase from 7.3 percent of GDP in 2010 to 9.4 percent of GDP in 2025 and health care expenditures from 4.0 percent of GDP to 5.9 percent of GDP.
The rule assumes that the output-gap elasticity of revenue is equal to one which roughly corresponds to the actually observed revenue response to changes in the real growth rate.
The maximum output gap of 5 percent is based on annual real GDP data covering the period 1970-1999 using a standard smoothness parameter (λ=100). As discussed in the following section variations in the smoothness parameter can increase or decrease the measured output gap. Production function estimates of potential output give a somewhat wider range of output gaps over the same period.
For example, much of the volatility of revenues in Figure I-7 stems from a high variability of receipts from the stamp duty and the withholding tax.
Pevenue forecast errors are approximated by the percentage difference between the budgeted and actual revenue receipts in a given yera. Average percentage deviations of the budgeted from actual revenue were 2.8 percent of revenue in the period 1970-1999.
Each estimate of the output gap is based on historical data plus data for the next five years.
Data Sources Definitions And Specification Issues
Bagliano, Fabio, and Carlo Favero, 1998, “Measuring Monetary Policy with VAR Models: An Evaluation,” European Economic Review Vol. 42. pp. 1069–1112
Belongia, Michael, 1988, “Stability of Swiss Money Demand: Evidence for 1982-87,” SNB Quarterly Bulletin Vol. 6. No. l., pp. 68–74.
Blejer, Mario, Alain Ize, Alfredo Leone, and Sergio Werlang, eds, 2000, “Inflation Targeting in Practice,” International Monetary Fund, Washington DC.
Briault, Clive, Andrew Haldane, and Mervyn King, 1996, “Independence and Accountability,” Bank of England Working Paper, No. 49.
Clarida, Richard, Jordi Gali, and Mark Gertler, 1997, “Monetary Policy Rules in Practice: Some International Evidence,” NBER Working Papers, No. 6254.
Clements, Benedict, Zenon Kontolemis, and Joaquim Levy, 2000, “Monetary Policy Under EMU: Differences in the transmission mechanism,” Mimeo, IMF
Cuche, Nicolas, 2000, “Monetary Policy with Forward-Looking Rules: The Swiss Case,” Studienzentrum Gerzensee Working Paper, No. 00–10
Dhar, Shamik, Darren Pain, and Ryland Thomas, 2000, “A Small Structural Empirical Model of the UK Monetary Transmission Mechanism,” Bank of England Working Paper, No. 113.
Dueker, Michael, and Andreas Fischer, 1996, “Inflation Targeting in a Small Open Economy: Empirical results for Switzerland,” Journal of Monetary Economics, Vol. 37. pp. 89–103
Ettlin, Franz, 1994, “Economic Activity Effects of Monetary Policy Through the Interest Rate and Excahnge Rate Channels. A reduced Form Model with an Application to Switzerland.” Paper presented at the International Symposium on Economic Modelling, held at the World Bank, Washington DC, 22–24 June 1994.
- Search Google Scholar
- Export Citation
)| false Ettlin, Franz, 1994, “ Economic Activity Effects of Monetary Policy Through the Interest Rate and Excahnge Rate Channels. A reduced Form Model with an Application to Switzerland.” Paper presented at the International Symposium on Economic Modelling, held at the World Bank, Washington DC, 22–24 June 1994.
Geraats, Petra, 2001, “Why Adopt Transparency? The Publication of Central Bank Forecasts,” European Central Bank Working Paper, No. 41
Gersbach, Hans, and Volker Hahn, 2001, “Should the Individual Voting Records of Central Bankers be Published?” Economic Research Centre of the Deutsche Bundesbank, Discussion Paper, No. 02/01
Gertler, Mark, Simon Gilchrist, and Fabio Massimo Natalucci, 2000, “External constraints on monetary policy and the financial accelerator,” Mimeo, IMF
Leeper, Eric, Christopher Sims, and Tao Zha, 1996, “What does monetary policy do?” Brookings Papers on Economic Activity, No. 2, pp. 1–78.
Morsink, James, and Tamim Bayoumi, 1999, “A Peek Inside the Black Box: The Monetary Transmission Mechanism in Japan,” IMF Working Paper, WP/99/137
Orphanides, Athanasios, Richard. Porter, David Reifschneider, Robert Tetlow, and Federico Finan, 1999 “Errors in the Measurement of the Output Gap and the Design of Monetary Policy,” Federal Reserve Board FEDS Papers, No. 1999–45.
Peytrignet, Michel, and Andreas Fischer, 1991, “Agregats Monetaires Suisses: Ml Exogene ou Endogene?” SNB Quarterly Bulletin, Vol. 9. No. 3., pp. 248–281.
Ramaswamy, Ramana, and Torsten Sk>k, 1997, “The Real Effects of Monetary Policy in the European Union: What are the Differences?” IMF Working Paper, No. WP/97/160
Rich, Georg, 1989, “Geldmengeziele und Sweizerische Geldpolitik: eine Standortbestimmung,” SNB Quarterly Bulletin, Vol. 7. No. 4., pp. 345–360.
Rich, Georg, 1997, “Monetary Targets as a Policy Rule: Lessons from Swiss Experience,” Journal of Monetary Economics, Vol. 39. No 1., pp. 113–141.
Rich, Georg, 2000, “Monetary Policy without Central Bank Money: A Swiss Perspective.” Paper presented at the World Bank conference on the Future of Monetary Policy.
Ricketts, Nicolas, and David Rose, 1995, “Inflation, Learning, and Monetary Policy Regimes in the G-7 Economies,” Bank of Canada Working Paper, No. 95–6.
Sims, Christopher, 1986, “Are Forecasting Models Usable for Policy Analysis?” Quarterly Review, Federal Reserve Bank of Minneapolis, 10: 2–16
Tetlow, Robert, and Peter von zur Muehlen, 2000, “Robust Monetary Policy with Misspecified Models: Does Model Uncertainty Always Call for Attenuated Policy?” Federal Reserve Board FEDS Papers, No. 2000-28.
Winkler, Bernhard, 2000, “Which Kind of Transparency? On the Need for Clarity in Monetary Policy-Making,” European Central Bank Working Paper, No. 26.
Prepared by Kornélia Krajnyák.
“The Bank will react appropriately to any unexpected developments, which would prove detrimental to the Swiss economy without losing sight of the goal of price stability”, Quarterly Bulletin 1997/2, p. 166. Also, the SNB “[retains] the option of deviating from its monetary course in the event of serious disruptions in the financial markets”, Quarterly Bulletin 1996/4, p.295.
Topics of the studies published in the SNB Quarterly Bulletin are probably an indicator of this process. Between 1990 and 1996, all but one volume contained at least one article on a topic closely related to monetary targeting (e.g., money demand, monetary aggregates, etc.). However, other topics also begin to surface (transparency in 1993, inflation targeting in 1994, etc.), and by 1997, none of the articles are closely related to monetary targeting.
“Transparency” of monetary policy making is defined as open, clear, and honest communication of (i) policy objectives (goal transparency); (ii) economic information such as the central bank’s assessment of the current economic situation and its forecasts complete with the appropriate data, models, and methods (economic transparency); (iii) procedures; (iv) policy decisions; and (v) operations. Similar interpretations are used by Winkler (2000), Gersbach-Hahn (2001), and Geraats (2001). “Accountability” is understood to be as the monitoring and ex post evaluation (complete with possible penalties) of the central bank’s policymaking activity.
An example is publishing the voting records of uninformed central bankers in Gersbach and Hahn (2001).
By construction, the inflation objective variable incorporates features of both the inflation goal and the inflation forecast.
The Akaike and Schwarz information criteria do not indicate that longer lag length is warranted, and the results remain broadly stable when the system is reestimated with longer lag length. The Appendix discusses the specification issues in more detail.
The effect on the growth rate turns negative earlier, with a lag of 3 quarters (at the point when the output gap starts declining).
Rents, which comprise over just 20 percent of the Swiss consumption basket, are indexed to interest rates. Although excluding interest rate induced variation in rents from the CPI would be desirable, excluding rents altogether is more problematic, as it skews CPI inflation towards non-domestic components. In the event, it turns out that the impulse functions are not greatly changed if rents are excluded from the CPI.
See for instance Sims (1986) and Leeper et al (1996). In the first case (improper identification), the impulse response could trace the reaction of prices to velocity shocks. In the second case (incomplete specification), information about future inflation available to the policymaker when making her monetary policy decision, but not included in the model, would produce the mirage of inflationary effects of a contractionary monetary policy shock.
An example of such a shock is a financial innovation which facilitates monitoring of borrowers. This is likely to ease credit constraints immediately but feed through to (measured) potential output with a delay. Another example is a shock to real estate prices, which decreases collateral and tightens financing constraints.
For instance Ramaswamy and Sløk (1997), and Clements, Kontolemis and Levy (2000) find that maximum output response occurs after 1½–2½ quarters for European countries. Real output response ranges between 0.4–1 percent, which is larger than for Switzerland. However, these estimates are based on different (level) specifications of the VAR model.
This experiment involves recalculating the impulse responses after excluding the variable in question from among the endogeneous variables and including its lagged values among the exogenous variables.
Strictly speaking, the weight of interest rate shocks should be based on the impulse response excluding the exchange rate channel.
Including quarterly dummies made no difference to the estimates.
Change in inflation is measured as d pi = pi-pi(-1)=(p - p(-4))-(p(-1)-p(-5)), where p denotes log CPI. Results from a similar specification using pi-pi(-4) as the dependent variable and appropriately defined RHS variables are qualitatively similar, but errors in that regression are serially correlated. Including quarterly dummies makes no difference in either case.
In recent years, estimating Taylor rules has developed into a minor industry. Some examples are Clarida, Gali, and Gertler (1995) for the G-3; Nelson (2000) for the U.K; and Cuche (2000) for Switzerland.
The nominal exchange rate trend is derived using an HP filter. In this equation, the level, rather than the change of the exchange rate is included, reflecting the evidence that periodically, monetary policy reacted to the level of the exchange rate.
Policy implications of uncertainties associated with the transmission mechanism are not clear-cut, cf. for instance Orphanides et al (1999) and Tetlow et al (2000). Intuitively, when the source of uncertainty is mismeasurement, then observed macroeconomic variables contain limited information for the policymaker and thus trigger relatively weak policy response. In contrast, when there is uncertainty regarding the model, more aggressive policy response might be called for.
As the inflation objective variable used in Section C shares features with both the inflation goal and the inflation forecast (see Appendix), the empirical results can be interpreted in favor of both goal and economic transparency.
Some of the literature estimates similar specifications as a vector error correction mechanism for the level of output, prices, exchange rates etc (Dhar et al (2000) represents a recent example). This route was not followed here because estimating cointegrating relationships over a time period little longer than 15 years requires a considerable stretch of imagination.