Modeling Monetary Transmission in Switzerland with a Structural Cointegrated VAR Model

Abstract

Summary This paper examines the transmission of monetary policy in Switzerland using a structural cointegrated VAR model that includes real money, real output, a long and short-term interest rate, inflation, the exchange rate and a foreign interest rate as endogenous variables and oil prices as exogenous variables. The model takes account of five cointegrating relations that are interpreted as money demand, the real interest rate, the term spread, uncovered interest parity and an aggregate demand schedule. Recursive analysis confirms that the model remains stable after the adoption of a new monetary policy framework of the Swiss National Bank in 2000. After identifying a monetary policy shock, the model is used for impulse-response analysis. We obtain plausible responses of inflation and output to a monetary policy shock but despite the inclusion of money and oil prices an exchange rate puzzle remains present.