Introduction

Consistently ranked high on the human development index and with the sixth highest GDP-per-capita, Switzerland is considered a competitive economy on the global stage. Competitiveness is fueled by the primarily services-based economy, with 74% of its GDP coming from the services sector and 25% from industry. Switzerland has a population of around 9 million, with a population growth rate of around 1% in recent years. Recently, tariffs and uncertainty regarding trade deals have led to lower growth in the pharmaceutical industry, which accounts for half of Swiss economic growth, raising concerns that overall GDP growth may slow in the future.

Macroeconomic Indicators

The previous graph shows the relationship between education, gender, and labor markets over time in Switzerland. The data illustrates that women with a higher education have had a lower employment rate than men throughout the last thirty years. Additionally, it shows a steep drop in the labor market’s education in the 1990s. This shows a higher demand for unskilled workers throughout the years. This idea is strengthened with the declining rate of highly educated agents in the economy.

Macroeconomic Analysis and Predictions

1. The 2015 Capping of the Swiss Franc

I. Introduction

In January of 2015, the Swiss franc was pegged to the euro, capping the exchange rate at 1.2 francs per euro. Before this time, Switzerland was an expensive place to do business, one of the most expensive in Europe. This policy took place when Switzerland was a haven for investment in Europe, causing the franc to become highly overvalued and making Swiss exports expensive. By weakening the currency, the policy increased net exports, as Swiss goods became cheaper for foreign buyers and imports became more expensive, leading aggregate demand to shift outward. At the same time, the depreciation of the franc raised the cost of imported raw materials and intermediate goods, increasing production costs for firms and causing the short-run aggregate supply to shift inward. Overall, this policy affected both aggregate demand and aggregate supply, increasing demand through exports while also putting upward pressure on costs and prices, shifting supply.

II. Model-Based Analysis

AD AS Diagram

AD ↑: A weaker franc raises net exports and increases domestic demand for Swiss-produced goods by making imports relatively more expensive, so AD shifts to the right

SRAS ↓: At the same time, a weaker franc makes imported goods and imported inputs more expensive, so firms face higher costs. That shifts SRAS left.

IS LM

IS ↑: Because the peg keeps the franc weaker, Swiss exports rise, and domestic buyers switch some spending away from imports toward Swiss goods. That raises planned expenditure at each interest rate, so IS shifts to the right.

LM ↓: The peg raises the price level in the short run and even more in the long run. Since real money balances are lower, it shifts LM to the left, first in the short run and further in the long run.

Labor Market

SR: Because the peg raises the price level in the short run while expected prices have not yet fully adjusted, the labor supply shifts downward. As a result, the real wage falls, and employment rises.

LR: Since the expected price and price are equal and Z does not change, the labor supply returns to the same real-wage level as before. Therefore, the economy returns to its natural level of employment, and the real wage returns to its original level.

III. Comparison with Real Economic Outcomes

Swiss CHF/EUR Peg: Expected vs Actual

CHF/EUR Cap

	SR Expected	SR Actual	LR Expected	LR Actual
P	↑	↓	↑↑	↓↓
Y	↑	↓	No Δ	No Δ
r	↑	↓	↑	↓↓
I	Amb.	↑ then No Δ	No Δ	No Δ
C	↑	↑	No Δ	↑
N	↑	↑ then ↓	No Δ	↓
W/P	↓	↑	No Δ	↑

Swiss CHF/EUR cap: model vs. actual.

IV. Discrepancies and Interpretation

Model inaccuracies and possible explanations

Prices actually fell, one reason that could explain the model miss was the implementation of stricter regulations on banks, causing higher liquidity requirements and lowering the money supply/money multiplier, which would shift AD inward and lower prices.

Cost-pull likely outpaced demand push, causing a lower output in the short term vs the expected rise from our model. For the interest rate, consumer sentiment likely fell because of households seeing a decrease in the relative value of their currency and assets.

Refinements to the model:

Accounting for how consumers would respond to a decrease in the value of their currency explains many of the model misses (such as the short-run drops in P and Y). Looking at the flow of Switzerland’s currency and how the exchange rate cap changed the inflow and outflow of capital could explain the short-term investment changes, as well as the employment level. Finally, policy changes that directly impact the money supply could be incorporated to better model interest rate changes.

2. Switzerland's Debt Brake

I. Introduction

Switzerland’s Debt brake was approved by 85% of voters in 2001, and in September 2003 was. It was a constitutional fiscal rule that limits government spending to expected revenue over the business cycle. Requiring a surplus during economic booms and a minimal deficit during economic downturns, this effectively lowered government spending. Concerns about rising public debt and long-term fiscal sustainability led to this; Switzerland’s balance sheets sank into a deficit in the years before the brake, prompting the population to call for a new budget-balancing policy. There was no tax increase relative to GDP during this time, thus implying a reduction in government spending. As a result, aggregate demand shifted inward, since lower government spending directly reduces overall demand in the economy.

II. Model Based Analysis

AD AS

G↓: The Swiss debt brake lowered government spending because the government did not implement tax reforms to raise revenue during this time. This means it had to rely on spending cuts to stay within the debt limit.

AD↓: Because government spending is a component of aggregate demand, if the debt brake causes the government to cut spending, then AD falls and shifts left.