Discretionary Fiscal Policy: The Case of Switzerland

KOF Working Paper No. 253

33 Pages Posted: 19 Feb 2010

See all articles by Andres Frick

Andres Frick

Swiss Federal Institute of Technology Zurich - Swiss Institute for Business Cycle Research (KOF)

Michael Graff

ETH Zurich

Jochen Hartwig

ETH Zurich - Swiss Economic Institute

Boriss Siliverstovs

German Institute for Economic Research (DIW Berlin) - Department of International Economics

Date Written: February 1, 2010

Abstract

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.

Keywords: Anti-cyclical fiscal policy, international, simulations, multiplier, free-riding

JEL Classification: E17, E32, E62

Suggested Citation

Frick, Andres and Graff, Michael and Hartwig, Jochen and Siliverstovs, Boriss, Discretionary Fiscal Policy: The Case of Switzerland (February 1, 2010). KOF Working Paper No. 253, Available at SSRN: https://ssrn.com/abstract=1554331 or http://dx.doi.org/10.2139/ssrn.1554331

Andres Frick (Contact Author)

Swiss Federal Institute of Technology Zurich - Swiss Institute for Business Cycle Research (KOF) ( email )

ETH-Zentrum
CH-8092 Zurich
Switzerland
+41446325157 (Phone)

HOME PAGE: http://www.kof.ethz.ch/

Michael Graff

ETH Zurich ( email )

KOF Swiss Economic Institute
Leonhardstrasse 21
CH-8092 Zurich, 8092
Switzerland

Jochen Hartwig

ETH Zurich - Swiss Economic Institute ( email )

CH-8092 Zurich
Switzerland

Boriss Siliverstovs

German Institute for Economic Research (DIW Berlin) - Department of International Economics ( email )

Mohrenstraße 58
Berlin, 10117
Germany

HOME PAGE: http://www.diw.de/programme/jsp/MA.jsp?language=en&uid=bsiliverstovs

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