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Semi-Parametric Estimates of Taylor Rules for a Small, Open Economy – Evidence from Switzerland

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  • Thomas Nitschka
  • Nikolay Markov
Abstract
This article estimates the policy reaction function of the Swiss National Bank (SNB) using real-time internal inflation forecasts and output gap estimates from 2000 to 2012. We analyze potential nonlinearities of policy rate responses to economic fundamentals using a novel semiparametric approach. We find a linear response of the SNB’s policy rate to inflation forecasts but a strong nonlinear response of the policy rate to the output gap and exchange rate changes. This finding suggests that the SNB reacts to extreme movements of these variables if they become a concern for price stability and economic activity.
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  • Thomas Nitschka & Nikolay Markov, 2016. "Semi-Parametric Estimates of Taylor Rules for a Small, Open Economy – Evidence from Switzerland," German Economic Review, Verein für Socialpolitik, vol. 17(4), pages 478-490, November.
    • Handle: RePEc:bla:germec:v:17:y:2016:i:4:p:478-490
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    File URL: http://hdl.handle.net/10.1111/geer.12080
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    1. Nicolas A. Cuche, 2000. "Monetary policy with forward-looking rules: The Swiss case," Working Papers 00.10, Swiss National Bank, Study Center Gerzensee.
    2. Gozalo, Pedro L. & Linton, Oliver B., 2001. "Testing additivity in generalized nonparametric regression models with estimated parameters," Journal of Econometrics, Elsevier, vol. 104(1), pages 1-48, August.
    3. Ernst Baltensperger & Philipp Hildebrand & Thomas Jordan, 2007. "The Swiss National Bank's monetary policy concept - an example of a 'principles-based' policy framework," Economic Studies 2007-03, Swiss National Bank.
    4. Hans Genberg & Stefan Gerlach, 2010. "Swiss Monetary Policy 2000-2009," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 146(I), pages 131-165, March.
    5. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
    6. Dr. Marco Huwiler & Daniel Kaufmann, 2013. "Combining disaggregate forecasts for inflation: The SNB's ARIMA model," Economic Studies 2013-07, Swiss National Bank.
    7. Qin, Ting & Enders, Walter, 2008. "In-sample and out-of-sample properties of linear and nonlinear Taylor rules," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 428-443, March.
    8. Thomas J. Jordan & Michel Peytrignet & Enzo Rossi, 2010. "Ten Years' Experience with the Swiss National Bank's Monetary Policy Strategy," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 146(I), pages 9-90, March.
    9. Rina Rosenblatt-Wisch & Rolf Scheufele, 2015. "Quantification and characteristics of household inflation expectations in Switzerland," Applied Economics, Taylor & Francis Journals, vol. 47(26), pages 2699-2716, June.
    10. Young‐Ju Kim & Chong Gu, 2004. "Smoothing spline Gaussian regression: more scalable computation via efficient approximation," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 66(2), pages 337-356, May.
    11. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    12. Gregor Bäurle & Tobias Menz, 2008. "Monetary Policy in a Small Open Economy Model: A DSGE-VAR Approach for Switzerland," Working Papers 08.03, Swiss National Bank, Study Center Gerzensee.
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    Cited by:

    1. Fabian Fink & Lukas Frei & Thomas Maag & Tanja Zehnder, 2024. "The Impact of SNB Monetary Policy on the Swiss Franc and Longer-Term Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 20(1), pages 53-92, February.

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