Andres Frick

Are there free rides out of a recession? The case of Switzerland

During the 2008/2009 recession, most countries resorted to discretionary fiscal policy measures. In this paper, we run two simulations with the KOF Swiss Economic Institute’s macroeconomic model to assess how both the Swiss stimulus measures, and the measures taken by Switzerland’s major trading partners, have affected the Swiss economy. The KOF baseline estimate incorporates fiscal stimulus packages in Switzerland and abroad. We re-run the model, modifying the exogenous variables to represent situations in which no fiscal action was taken (a) in Switzerland and (b) elsewhere. We find that the spillover from the foreign efforts to curb the recession dwarfs the effect of the domestic stimulus packages. In addition to making its own (rather limited) efforts to fight the recession, Switzerland also took a long free-ride that far exceeded the short one it paid for.

Discretionary Fiscal Policy: The Case of Switzerland

Towards the end of 2009, the world economy was recovering from its deepest recession since the end of World War II. Most countries around the world took resort to fiscal policy in order to foster this recovery. In this paper, we first discuss the pros and cons of discretionary fiscal policy from a history of economic thought perspective. Next, we summarise the fiscal policy measures taken in Switzerland. Then we use simulations with the KOF macroeconomic model to assess the effects on the Swiss economy of a) the Swiss measures on the one hand and b) the fiscal stimulus package taken by Switzerland’s most important trading partners on the other. The KOF September 2009 forecast, which incorporates the fiscal stimuli that were launched or in the pipeline at that time, serves as the baseline scenario. To assess the impacts of the fiscal stimulus packages in Switzerland and abroad, we re-run the KOF macroeconometric model counterfactually, modifying the variables pertaining to the domestic and the international economy respectively to represent a situation in which no fiscal action had been taken. We find that the spillover from the foreign efforts to curb the recession clearly dwarfs the effect from the domestic stimulus packages. This holds even if we resort to an extremely cautious scenario where external demand for Swiss exports derived from the weighted GDP of the most important importers is only 50% of what it would be in normal times. Hence we conclude that in addition to its own (rather limited) efforts to fight the recession, Switzerland took a long free ride that by far exceeded the short one it paid for.