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Estimating a Taylor Rule with Markov Switching Regimes for Switzerland

Swiss Journal of Economics and Statistics volume 145, pages 187–220 (2009)Cite this article

Summary

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.

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  1. Department of Economics, University of California, San Diego, USA

    Alexander Perruchoud

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  1. Alexander Perruchoud
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Correspondence to Alexander Perruchoud.

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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.

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

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Perruchoud, A. Estimating a Taylor Rule with Markov Switching Regimes for Switzerland. Swiss J Economics Statistics 145, 187–220 (2009). https://doi.org/10.1007/BF03399280

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