Swiss Journal of Economics and Statistics

, Volume 148, Issue 1, pp 57–75 | Cite as

Is there a Swiss price puzzle?

  • Daniel Kaufmann
  • Sarah Lein
Open Access


This paper estimates the response of consumer prices to a monetary policy shock in Switzerland. We find that there is no evidence of a price puzzle at the aggregate level. This is because our factor-augmented vector autoregression (FAVAR) avoids misspecification by including more information than a traditional VAR. However, the response is still delayed by at least four quarters, partly because there is a price puzzle in some sectors. In particular, rents tend to rise after a monetary policy tightening because there are legal provisions in Switzerland which link them to interest rates. But durable goods prices also rise, which is consistent with the existence of a cost channel of monetary policy.


E31 E4 E5 C38 


monetary policy transmission price puzzle cost channel FAVAR 


  1. Assenmacher-Wesche, Katrin (2008), “Modeling Monetary Transmission in Switzerland with a Structural Cointegrated VAR Model”, Swiss Journal of Economics and Statistics, 144(2), pp. 197–246.CrossRefGoogle Scholar
  2. Bai, Jushan, and Serena Ng (2002), “Determining the Number of Factors in Approximate Factor Models”, Econometrica, 70(1), pp. 191–221.CrossRefGoogle Scholar
  3. Bai, Jushan, and Serena Ng (2004), “Confidence Intervals for Diffusion Index Forecasts with a Large Number of Predictors”, Mimeo.Google Scholar
  4. Barth, Marvin J., and Valerie A. Ramey (2002), “The Cost Channel of Monetary Transmission”, in NBER Macroeconomics Annual, Ben S. Bernanke and Kenneth Rogoff, eds, vol. 16, chap. 4, pp. 199–256, Cambridge: MIT Press.Google Scholar
  5. Bernanke, Ben, Jean Boivin and Piotr S. Eliasz (2005), “Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach”, The Quarterly Journal of Economics, 120(1), pp. 387–422.Google Scholar
  6. Boivin, Jean, Marc P. Giannoni and Ilian Mihov (2009), “Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data”, American Economic Review, 99(1), pp. 350–384.CrossRefGoogle Scholar
  7. Castelnuovo, Efrem, and Paolo Surico (2010), “Monetary Policy, Inflation Expectations and the Price Puzzle”, The Economic Journal, 120(549), pp. 1262–1283.CrossRefGoogle Scholar
  8. Chowdhury, Ibrahim, Mathias Hoffmann, and Andreas Schabert (2006), “Inflation Dynamics and the Cost Channel of Monetary Transmission”, European Economic Review, 50(4), pp. 995–1016.CrossRefGoogle Scholar
  9. Dickey, David A., and Wayne A. Fuller (1979), “Distribution of the Estimators for Autoregressive Time Series with a Unit Root”, Journal of the American Statistical Association, 74(366), pp. 427–431.CrossRefGoogle Scholar
  10. Eichenbaum, Martin (1992), “‘Interpreting the Macroeconomic Time Series Facts: The Effects Of Monetary Policy’: by Christopher Sims”, European Economic Review, 36(5), pp. 1001–1011.CrossRefGoogle Scholar
  11. Giordani, Paolo (2004), “An Alternative Explanation of the Price Puzzle”, Journal of Monetary Economics, 51(6), pp. 1271–1296.CrossRefGoogle Scholar
  12. Hamilton, James D. (1994), Time Series Analysis, Princeton: Princeton University Press.Google Scholar
  13. Henzel, Steffen, Oliver Hülsewig, Eric Mayer and Timo Wollmershäuser (2009), “The Price Puzzle Revisited: Can the Cost Channel Explain a Rise in Inflation after a Monetary Policy Shock?”, Journal of Macroeconomics, 31(2), pp. 268–289.CrossRefGoogle Scholar
  14. Jordan, Thomas J., Michel Peytrignet and Enzo Rossi (2010), “Ten Years’ Experience with the Swiss National Bank’s Monetary Policy Strategy”, Swiss Journal of Economics and Statistics, 146(1), pp. 9–90.CrossRefGoogle Scholar
  15. Kaufmann, Daniel (2009), “Price-Setting Behaviour in Switzerland: Evidence from CPI Micro Data”, Swiss Journal of Economics and Statistics, 145(3), pp. 293–349.CrossRefGoogle Scholar
  16. Kilian, Lutz (1998), “Small-Sample Confidence Intervals for Impulse Response Functions”, The Review of Economics and Statistics, 80(2), pp. 218–230.CrossRefGoogle Scholar
  17. Kwiatkowski, Denis, Peter C. B. Phillips, Peter Schmidt and Yongcheol Shin (1992), “Testing the Null Hypothesis of Stationarity against the Alternative of a Unit Root: How Sure Are We that Economic Time Series Have a Unit Root?”, Journal of Econometrics, 54(1–3), pp. 159–178.CrossRefGoogle Scholar
  18. Leeper, Eric M., and Tao Zha (2001), “Assessing Simple Policy Rules: A View from a Complete Macroeconomic Model”, Federal Reserve Bank of St. Louis Review, 83(4), pp. 83–110.Google Scholar
  19. Rabanal, Pau (2007), “Does Inflation Increase after a Monetary Policy Tightening? Answers Based on an Estimated DSGE model”, Journal of Economic Dynamics and Control, 31(3), pp. 906–937.CrossRefGoogle Scholar
  20. Ravenna, Federico, and Carl E. Walsh (2006), “Optimal Monetary Policy with the Cost Channel”, Journal of Monetary Economics, 53(2), pp. 199–216.CrossRefGoogle Scholar
  21. Sims, Christopher A. (1992), “Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy”, European Economic Review, 36(5), pp. 975–1000.CrossRefGoogle Scholar
  22. Stalder, Peter (2003), “The Decoupling of Rents from Mortgage Rates: Implications of the Rent Law Reform for Monetary Policy”, Swiss National Bank Quarterly Bulletin, 3, pp. 44–57.Google Scholar
  23. Stock, James H., and Mark W. Watson (2002), “Macroeconomic Forecasting using Diffusion Indexes”, Journal of Business & Economic Statistics, 20(2), pp. 147–162.CrossRefGoogle Scholar
  24. Stock, James H., and Mark W. Watson (2005), “Implications of Dynamic Factor Models for VAR Analysis”, NBER Working Paper No. 11467, National Bureau of Economic Research.Google Scholar
  25. Tillmann, Peter (2008), “Do Interest Rates Drive Inflation Dynamics? An Analysis of the Cost Channel of Monetary Transmission”, Journal of Economic Dynamics and Control, 32(9), pp. 2723–2744.CrossRefGoogle Scholar
  26. Walsh, Carl E. (2003), Monetary Theory and Policy, 2nd edn., Cambridge: MIT Press.Google Scholar

Copyright information

© Swiss Society of Economics and Statistics 2012

Authors and Affiliations

  1. 1.Swiss National BankZürichSwitzerland

Personalised recommendations