Swiss Journal of Economics and Statistics

, Volume 146, Issue 1, pp 275–300 | Cite as

Measuring the natural output level by DSGE models: An empirical investigation for Switzerland

  • Stefan Leist
  • Klaus Neusser
Open Access


The output gap plays an important role in the assessment and conduct of monetary policy. Most of the current literature, however, relies on filtering procedures which use ad hoc smoothness arguments for identification. Furthermore, they are subject to end-of-sample problems and do not provide estimates of the output gap based on economic theory. In contrast, our model-based approach relies on a precise definition of the natural level of output and consequently of the output gap. This paper provides, for the first time, an estimate of the output gap based on a DSGE small open economy model for Switzerland. We use Bayesian econometrics to derive an estimate of the output gap, which is then compared to some alternatives. Except for the last years, our measure of the output gap is close to zero most of the time. This suggests that price rigidities play a minor role in the propagation of the Swiss business cycle. We show that our estimate produces sensible and robust results which encourage further research.


DSGE models Bayesian econometrics output gap natural level of output small open economy 


C11 C51 E32 F41 


  1. An, S., and F. Schorfheide (2007), “Bayesian analysis of DSGE models”, Econometric Reviews, 26, pp. 113–172.CrossRefGoogle Scholar
  2. Andrés, J., D. López-Salido, and E. Nelson (2005), “Sticky-Price Models and the Natural Rate Hypothesis”, Journal of Monetary Economics, 52, pp. 1025–1053.CrossRefGoogle Scholar
  3. Assenmacher-Wesche, K., and S. Gerlach (2008), “Money Growth, Output Gaps and Inflation at Low and High Frequency: Spectral Estimates for Switzerland”, Journal of Economic Dynamics and Control, 32, pp. 411–435.CrossRefGoogle Scholar
  4. Bäurle, G., and T. Menz (2008), Monetary Policy in a Small Open Economy Model: A DSGE-VAR Approach for Switzerland, Ph.D. dissertation, Department of Economics, University of Bern, Bern, Switzerland.Google Scholar
  5. Beltran, D. O., and D. Draper (2008), “Estimating the Parameters of a Small Open Economy DSGE Model: Identifiability and Inferential Validity”, International Finance Discussion Paper 955, Board of Governors of the Federal Reserve System.Google Scholar
  6. Bignasca, F., and E. Rossi (2007), “Applying the Hirose-Kamada Filter to Swiss Data: Output Gap and Exchange Rate Pass-Through Estimates”, Swiss National Bank Working Papers 2007-10, Swiss National Bank, Zürich.Google Scholar
  7. Canova, F., and L. Sala (2009), “Back to Square One: Identification Issues in DSGE Models”, Journal of Monetary Economics, 56, pp. 431–449.CrossRefGoogle Scholar
  8. Cavaliere, M. (2007), Exchange Rate Pass-Through to Process: Characteristics and Implications, Dissertation Series 8, Study Center Gerzensee.Google Scholar
  9. DeJong, D. N., and C. Dave (2007), Structural Macroecometrics, Princeton University Press, Princeton and Oxford.Google Scholar
  10. Del Negro, M., and F. Schorfheide (2008), “Inflation Dynamics in a Small Open Economy Model under Inflation Targeting— Some Evidence from Chile, in: K. Schmidt-Hebbel and C. Walsh (eds), Monetary Policy under Uncertainty and Learning, Central Bank of Chile, Santiago, Chile.Google Scholar
  11. Edge, R. M., M. T. Kiley, and J.-P. Laforte (2008), “Natural Rate Measures in an Estimated DSGE Model of the U.S. Economy”, Journal of Economic Dynamics and Control, 32, pp. 2512–2535.CrossRefGoogle Scholar
  12. Fernández-Villaverde, J. (2009), “The Econometrics of DSGE Models”, PIER Working Paper 09-008, Penn Institute for Economic Research, Philadelphia, 2009.Google Scholar
  13. Friedman, M. (1968), “The Role of Monetary Policy”, American Economic Review, 58, pp. 1–17.Google Scholar
  14. Galí, J., and T. Monacelli (2005), “Monetary Policy and Exchange Rate Volatility in a Small Open Economy”, Review of Economic Studies, 72, pp. 707–734.CrossRefGoogle Scholar
  15. Gerlach; S.; and F. Smets; (1999), “Output Gaps and Monetary Policy in the EMU Area”, European Economic Review, 43; pp. 801–812.CrossRefGoogle Scholar
  16. Geweke, J. (2005), Contemporary Bayesian Econometrics and Statistics, Wiley-Interscience, Hoboken, New Jersey.CrossRefGoogle Scholar
  17. Goodfriend, M. (2007), “How the World Achieved Consensus on Monetary Policy”, Journal of Economic Perspectives, 21, pp. 47–68.CrossRefGoogle Scholar
  18. Goodfriend, M., and R. G. King (1997), “The New Neoclassical Synthesis and the Role of Monetary Policy”, in: B. S. Bernanke and J. J. Rotemberg (eds), Macroeconomics Annual 1997, volume 12, National Bureau of Economic Research, MIT Press, Cambridge, Massachusetts, pp. 231–283.Google Scholar
  19. Hall, R. E. (2005), “Separating the Business Cycle from other Economic Fluctuations”, in: The Greenspan Era: Lessons for the Future, Federal Reserve Bank of Kansas City, pp. 133–179.Google Scholar
  20. Harvey, A. C., and A. Jäger (1993), “Detrending, Stylized Facts and the Business Cycle”, Journal of Applied Econometrics, 8, pp. 231–247.CrossRefGoogle Scholar
  21. Ireland, P. (2004), “Technology Shocks in the New Keynesian Model”, Review of Economics and Statistics, 86, pp. 923–936.CrossRefGoogle Scholar
  22. Justiniano, A., and B. Preston (2009), “Monetary Policy and Uncertainty in an Empirical Small Open Economy Model”, Journal of Applied Econometrics, forthcoming.Google Scholar
  23. Justiniano, A., and G. E. Primiceri (2008), Potential and Natural Output, 2008, manuscript.Google Scholar
  24. Kaufmann, D. (2009), “The Price Setting Behaviour in Switzerland— Evidence from CPI Micro Data”, Swiss Journal of Economics and Statistics, 145: forthcoming, 2009.Google Scholar
  25. Leeper, E. M., and C. A. Sims (1994), “Toward a Modern Macroeconomic Model Usable for Policy Analysis”, in: S. Fischer and J. J. Rotemberg (eds), NBER Macroeconomics Annual 1994, volume 9, National Bureau of Economic Research, Inc, MIT Press, Cambridge, Massachusetts, pp. 81–118.Google Scholar
  26. Lubik, T. A. and F. Schorfheide (2007), “Do Central Banks Respond to Exchange Rate Movements? A Structural Investigation”,Journal of Monetary Economics, 54, pp. 1069–1087.CrossRefGoogle Scholar
  27. McCallum, B. T. (2001), “Should Monetary Policy Respond Strongly to Output Gaps?”, American Economic Review (Papers and Proceedings), 91, pp. 258–262.CrossRefGoogle Scholar
  28. McCallum, B. T., and E. Nelson (1999), “Performance of Operational Policy Rules in an Estimated Semi-Classical Structural Model”, in: J. Taylor (ed.), Monetary Policy Rules, University of Chicago Press, Chicago, pp. 15–45.Google Scholar
  29. Mills, T. C. (2003), Modelling Trends and Cycles in Economic Time Series, Palgrave Texts in Econometrics, Palgrave MacMillan, New York.CrossRefGoogle Scholar
  30. Monacelli, T. (2005), “Monetary Policy in a Low Pass-Through Environment”, Journal of Money Credit and Banking, 37, pp. 1047–1066.CrossRefGoogle Scholar
  31. Neiss, K. S., and E. Nelson (2005), “Inflation Dynamics, Marginal Cost, and the Output Gap: Evidence from Three Countries”, Journal of Money, Credit, and Banking, 37, pp. 1019–1045.CrossRefGoogle Scholar
  32. Neusser, K. (2009), Zeitreihenanalyse in den Wirtschaftswissenschaften, Vieweg +Teubner, Wiesbaden, 2nd edition.Google Scholar
  33. Orphanides, A., and S. van Norden (2002), “The Unreliability of Output-Gap Estimates in Real Time”, Review of Economics and Statistics, 84, pp. 569–583.CrossRefGoogle Scholar
  34. Perruchoud, A. (2009), “Estimating a Taylor Rule with Markov Switching Regimes”, Swiss Journal of Economics and Statistics, 145, pp. 187–220.CrossRefGoogle Scholar
  35. Schorfheide, F. (2008), “DSGE Model-Based Estimation of the New Keynesian Phillips Curve”, Economic Quarterly, 94(4), pp. 397–433.Google Scholar
  36. Sims, C. A. (2001), “Solving Linear Rational Expectations Models”, Computional Economics, 20, pp. 1–20.Google Scholar
  37. Stalder, P. (2007), “The Changing Role of Foreign Labor and Female Participation: Impacts on Wage-Price Dynamics and Unemployment in Switzerland”, mimeo.Google Scholar
  38. Watson, M. F. (2007), “How Accurate Are Real-Time Estimates of Output Trends and Gaps?”, Economic Quarterly, 2, pp. 143–161.Google Scholar
  39. Woodford, M. (2003), Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press, Princeton, New Jersey.Google Scholar

Copyright information

© Swiss Society of Economics and Statistics 2010

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of BernBerneSwitzerland

Personalised recommendations