Skip to main content

Estimating a Taylor Rule with Markov Switching Regimes for Switzerland


In this paper a Taylor rule including the exchange rate gap is estimated for Switzerland under the assumption that the parameters depend on two states governed by a Markov switching process. The estimates from a Gibbs sampler suggest the presence of a smooth and an active regime. The former is characterized by a high degree of interest rate smoothing. By contrast, the aggressive regime shows much less smoothing. The regime probabilities indicate that Swiss monetary policy is well characterized by the smooth regime with short interruptions by the active regime. Many of these few active periods can be associated with specific and unusual events. Furthermore, the analysis makes clear that often the active regime prevailed in periods where the Swiss National Bank decided to counteract sharp appreciations or depreciations of the Swiss franc.


  • Albert, James H., and Siddhartha Chib (1993), “Bayes Inference via Gibbs Sampling of Autoregressive Time Series Subject to Markov Mean and Variance Shifts”, Journal of Business and Economic Statistics, 11 (1), pp. 1–15.

    Google Scholar 

  • Altavilla, Carlo, and Luigi Landolfo (2005), “Do Central Banks Act Asymmetrically? Empirical Evidence from the ECB and the Bank of England”, Applied Economics, 37, pp. 507–519.

    Article  Google Scholar 

  • Amano, Robert, Don Coletti, and Tiff Macklem (1999), “Monetary Rules When Economic Behaviour Changes”, Working Paper 81, Center for Research on Economic Fluctuations and Employment (CREFE).

  • Assenmacher-Wesche, Katrin (2006), “Estimating Central Banks’ Preferences from a Time-Varying Empirical Reaction Function”, European Economic Review, 50, pp. 1951–1974.

    Article  Google Scholar 

  • Baltensperger, Ernst, Philipp M. Hildebrand, and Thomas J. Jordan (2007), “The Swiss National Bank’s Monetary Policy Concept — an Example of a ‘Principles-Based’ Policy Framework”, Economic Studies 3, Swiss National Bank.

  • Barro, Robert J., and David B. Gordon (1983), “A Positive Theory of Monetary Policy in a Natural Rate Model”, Journal of Political Economy, 91, pp. 589–610.

    Article  Google Scholar 

  • Bernanke, Ben S., and Ilian Mihov (1995), “Measuring Monetary Policy”, Working Paper No. 5145, NBER.

  • Carlin, Bradley P., and Thomas A. Louis (2000), Bayes and Empirical Bayes Methods for Data Analysis. Texts in Statistical Science Series, Boca Raton, Chapman and Hall CRC Press.

    Book  Google Scholar 

  • Chow, Gregory C., and An-loh Lin (1971), “Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series”, Review of Economics and Statistics, 53 (4), pp. 372–375.

    Article  Google Scholar 

  • Chow, Gregory C., and An-loh Lin (1976), “Best Linear Unbiased Estimation of Missing Observations in an Economic Time Series”, Journal of the American Statistical Association, 71 (335), pp. 719–721.

    Article  Google Scholar 

  • Cuche, Nicolas A. (2000), “Monetary Policy with Forward-Looking Rules: The Swiss Case”, Working Papers No. 0010, Study Center Gerzensee.

  • Cuche, Nicolas A., and Martin K. Hess (1999), “Estimating Monthly GDP in a General Kalman Filter Framework: Evidence from Switzerland”, Working Papers No. 9902, Study Center Gerzensee.

  • Cukierman, Alex (1999), “The Inflation Bias Result Revisited”, Tel-Aviv University Working Paper No. 99-38.

  • Dueker, Michael, and Andreas M. Fischer (1995), “Inflation Targeting in a Small Open Economy: Empirical Results for Switzerland”, Working Papers No. 1995-014A, Federal Reserve Bank of St. Louis.

  • Elkhoury, Marwan (2006), “A Time-Varying Parameter Model of A Monetary Policy Rule for Switzerland. The Case of the Lucas and Friedman Hypothesis”, Working Papers No. 01-2006, HEI.

  • Friedman, Milton (1961), “The Lag in Effect of Monetary Policy”, Journal of Political Economy, 69, pp. 447–466.

    Article  Google Scholar 

  • Frühwirth-Schnatter, Sylvia (2004), “Estimating Marginal Likelihoods for Mixture and Markov Switching Models Using the Bridge Sampling Techniques”, Econometrics Journal, 7, pp. 143–167.

    Article  Google Scholar 

  • Gerlach-Kristen, Petra (2003), “Interest Rate Reaction Functions and the Taylor Rule in the Euro Area”, Working Paper No. 258, ECB.

  • Gerlach, Stefan (2003), “Recession Aversion, Output and the Kydland-Prescott Barro-Gordon Model”, Economics Letters, 81, pp. 389–394.

    Article  Google Scholar 

  • Gerlach, Stefan (2007), “Interest Rate Setting by the ECB, 1999–2006: Words and Deeds”, International Journal of Central Banking, 3 (3), pp. 1–45.

    Google Scholar 

  • Geweke, John (1992), “Evaluating the Accuracy of Sampling-Based Approaches to the Calculation of Posterior Moments”, in: J. O. Berger, J. M. Bernardo, A. P. Dawid and A. F. M. Smith (eds), Bayesian Statistics 4, Oxford University Press, pp. 164–193.

  • Hamilton, James D. (1989), “A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle”, Econometrica, 57 (2), pp. 357–384.

    Article  Google Scholar 

  • Hamilton, James D. (1994), Time Series Analysis, Princeton Universtiy Press.

  • Kass, Robert E., and Adrian E. Raftery (1995), “Bayes Factors”, Journal of the American Statistical Association, 90 (430), pp. 773–795.

    Article  Google Scholar 

  • Kim, Chang-Jin, and Charles R. Nelson (1999), State-Space Models with Regime Switching, Cambridge, MIT Press.

    Google Scholar 

  • Koop, Gary (2003), Bayesian Econometrics, Chichester, John Wiley.

    Google Scholar 

  • Kuzin, Vladimir (2006), “The Inflation Aversion of the Bundesbank: A State-Space Approach”, Journal of Economic Dynamics and Control, 30, pp. 1671–1686.

    Article  Google Scholar 

  • Kydland, Finn E., and Edward C. Prescott (1977), “Rules Rather Than Discretion: The Inconsistency of Optimal Plans”, Journal of Political Economy, 85, pp. 473–491.

    Article  Google Scholar 

  • Lucas, Robert E. Jr. (1976), “Econometric Policy Evalutaion: A Critique”, Carnegie Rochester Conference Series on Public Policy, 1, pp. 19–46.

    Article  Google Scholar 

  • McNees, Stephen K. (1986), “Modeling the Fed: A Forward-Looking Monetary Policy Reaction Function”, New England Economic Review, Nov./Dec., pp. 3–8.

  • Owyang, Michael T., and Garey Ramey (2004), “Regime Switching and Monetary Policy Measurement”, Journal of Monetary Economics, 51, pp. 1577–1597.

    Article  Google Scholar 

  • Persson, Torsten, and Guido Tabellini (1999), “Political Economics and Macroeconomic Policy”, in: J. B. Taylor and M. Woodford (ed.), Handbook of Macroeconomics, 1C, Amsterdam, Elsevier North-Holland, pp. 1397–1482.

    Chapter  Google Scholar 

  • Rabanal, Pau (2004), “Monetary Policy Rules and the U.S. Business Cycle: Evidence and Implications”, Working Paper No. 164, IMF.

  • Rich, Georg (1997), “Monetary Targets as a Policy Rule: Lessons from the Swiss Experience”, Journal of Monetary Economics, 39, pp. 113–141.

    Article  Google Scholar 

  • Rich, Georg (2003), “Swiss Monetary Targeting 1974–1996: The Role of Internal Policy Analysis”, Working Paper No. 236, ECB.

  • Rudebusch, Glenn D. (2001), “Is the Fed Too Timid? Monetary Policy in an Uncertain World”, Review of Economics and Statistics, 83 (2), pp. 203–217.

    Article  Google Scholar 

  • Ruge-Murcia, Francisco J. (2001), “The Inflation Bias when the Central Bank Targets the Natural Rate of Unemployment”, Cahiers de recherche 2001-22, Université de Montréal, Département de sciences économiques.

  • Sims, Christopher A., and Tao Zha (2006), “Were There Regime Switches in U.S. Monetary Policy?”, American Economic Review, 96 (1), pp. 54–81.

    Article  Google Scholar 

  • Smets, Frank (1998), “Output Gap Uncertainty: Does it matter for the Taylor Rule?”, Working Paper No. 60, BIS.

  • Svensson, Lars E.O. (1999), “Inflation Targeting: Some Extensions”, Scandinavian Journal of Economics, 101 (3), pp. 337–361.

    Article  Google Scholar 

  • Taylor, John B. (1993), “Discretion versus Policy Rules in Practice”, CarnegieRochester Conference Series on Public Policy, 39, pp. 195–214.

    Article  Google Scholar 

  • Wesche, Katrin (2003), “Monetary Policy in Europe: Evidence from Time-Varying Taylor Rules”, Econ Discussion Papers No. 21/2003, Bonn.

  • Woodford, Michael (1999), “Optimal Monetary Policy Inertia”, Working Paper No. 7261, NBER.

Download references

Author information

Authors and Affiliations


Corresponding author

Correspondence to Alexander Perruchoud.

Additional information

I am grateful for helpful comments provided by Peter Kugler, Stefan Gerlach, two anonymous referees, and seminar participants at the University of Bern. Of course, all remaining errors are mine.

Rights and permissions

Open Access This article is distributed under the terms of the Creative Commons Attribution 2.0 International License ( ), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Reprints and permissions

About this article

Cite this article

Perruchoud, A. Estimating a Taylor Rule with Markov Switching Regimes for Switzerland. Swiss J Economics Statistics 145, 187–220 (2009).

Download citation

  • Published:

  • Issue Date:

  • DOI: