We analyze how the transmission of international inflation spillovers depends on the nature of the underlying shocks that drive inflation abroad. We find evidence for substantial heterogeneity in the magnitude of spillovers to domestic inflation related to the fundamental source of international price fluctuations and the corresponding monetary policy reactions. Indeed, it turns out that the relative conduct of monetary policy varies depending on the source of these price fluctuations, and so does the role of the exchange rate as a shock absorber. We show this by looking at international inflation spillovers to Switzerland through the lenses of a Bayesian structural dynamic factor model relating a large set of disaggregated prices to key macroeconomic factors. Being a small open economy with an independent monetary policy, Switzerland is a particularly suitable subject for studying the role of monetary policy in the transmission of foreign shocks. However, our results more broadly indicate that inflation spillovers need to be analyzed in a framework allowing for different transmission channels.
For policy institutions such as central banks, it is important to have a timely and ac-curate measure of past and current economic activity and the business cycle situation. The most prominent example for such a measure is gross domestic product (GDP). However, GDP is only released at a quarterly frequency and with a substantial delay. Furthermore, it captures elements that are not directly linked to the business cycle and the underlying momentum of the economy. In this paper, I construct a new business cycle index for the Swiss economy, which uses state-of-the-art methods, is available at a monthly frequency and can be calculated in real-time, even when some indicators are not yet available for the most recent periods. The index is based on a large and broad set of monthly and quarterly indicators. As I show, for the case of Switzerland, it is important to base a business-cycle index on a broad set of indicators instead of only a small subset. This result contrasts with the results for other countries.
This paper examines liquidity in the Swiss franc repurchase (repo) market and assesses its determinants using a proprietary dataset ranging from 2006 to 2016. I find that repo market liquidity has a distinct intraday pattern, with low liquidity in early and late trading hours. Moreover, repo market liquidity is negatively affected by stress in the global financial system and the end of the minimum reserve requirement period if central bank reserves are scarce. Furthermore, I show that with excess central bank reserves in the financial system, quoted volumes in the interbank market get imbalanced towards more cash provider relative to cash taker quotes and the trading volume declines. By estimating liquidity in an interbank repo market and explaining its drivers, this paper contributes to the ongoing debate on repo market functioning.
