Business Cycles Association in a Small Monetary Union: The Case of Switzerland

Abstract

With its German, French, Italian, and Romansch Cantons, the Helvetic Federation is a small-scale version of the cultural, social, religious, and linguistic heterogeneities found in the European Union (EU). Although it is an interesting case study for observing the effects of idiosyncratic shocks within regional economies, few studies have been conducted that address Switzerland and the lessons it might hold for the EU, especially for the members of the European Monetary Union (EMU). We study the connections between the business cycles of Swiss regions. Evidence shows that Swiss cantons are closely related but there are dynamic effects toward more ‘independent’ business cycles. Despite the economic and cultural heterogeneity, Swiss cantons remain in the same political and monetary union, sharing a common central bank and a coordination/equalization mechanism for managing independent fiscal policies. Switzerland's ability to do these things should be a matter of interest to the EU.

avec ses cantons de langue allemande, française, italienne et romanche, la Confédération helvétique est une version à petite échelle de l'hétérogénéité culturelle, sociale, religieuse et linguistique, qui caractérise l'Union européenne (UE). Bien qu'il s'agisse d'une étude de cas intéressante, pour l'observation des effets des chocs caractéristiques au sein des économies régionales, bien peu d’études se sont penchées sur la Suisse et les enseignements que l'on pourrait en tirer, notamment pour les membres de l'Union monétaire européenne (UME). Nous étudions les rapports entre les cycles commerciaux des régions suisses, et nous démontrons que bien que les cantons suisses présentent des rapports étroits entre eux, on relève des effets dynamiques visant à des cycles commerciaux plus ‘indépendants’. En dépit de leur hétérogénéité économique et culturelle, les cantons suisses appartiennent toujours à la même union politique et monétaire, avec une banque centrale commune et un mécanisme de coordination/égalisation assurant l'administration de leurs politiques fiscales autonomes. La façon dont la Suisse parvient à faire tout ceci devrait être susciter un certain intérêt pour l'UE.

RESUMEN Con sus cantones alemanes, franceses, italianos y romanches, la Federación Helvética es una versión a pequeña escala de la heterogeneidad cultural, social, religiosa y lingüística que se puede ver en la Unión Europea (UE). Aunque es un estudio de caso interesante para observar los efectos de los choques idiosincráticos dentro de las economías regionales, se han conducido pocos estudios que tomen a Suiza como ejemplo y las lecciones que pudiera dar a la UE, especialmente para los miembros de la Unión Monetaria Europea (UME). Estudiamos la conexión entre los ciclos económicos de las regiones suizas. La evidencia demuestra que los cantones suizos tiene una estrecha relación entre sí, pero existen efectos dinámicos hacia ciclos económicos más ‘independientes’. A pesar de la heterogeneidad cultural y económica, los cantones suizos permanecen en la misma unión política y monetaria, compartiendo un banco central comn y un mecanismo de coordinación/ecualización para gestionar políticas fiscales independientes. La capacidad de Suiza para lograr esto debe ser materia de interés para la UE.

Keywords:

• Switzerland
• Business Cycles Association
• synchronization
• convergence

JEL CLASSIFICATION:

• C14
• E32
• F33
• R11

Acknowledgements

The authors would like to thank Todd Clark for sharing his Rats programmes for GMM estimation and two anonymous referees for helpful comments. The usual disclaimer applies.

Notes

1. In Appendix B we show the list of Swiss cantons, including the abbreviation of the name for each canton, its relative weight in Switzerland's total output, the official language(s) of each canton, and the predominant religion in each canton. The base year for the calculation of the relative weight of each canton is 2005.

2. In calculating the cantonal income, revenues of inter-cantonal commuters are attributed to the canton where the worker lives, but production accounts for the canton where he/she works. For small cantons which have a high proportion of commuters, the cantonal income can be greatly influenced. Additionally, corporate income from capital companies is recorded in the canton where the capital companies have their headquarters, which has a positive impact on cantons with large numbers of these companies. The construction of this regional variable was interrupted after 2005. Until this date no other regional variable was officially constructed for all cantons to replace the old definition (for a long time period). Some cantons have estimations of Gross Cantonal Product but existing data have a very short time span.

3. In all the sections that follow we provide tentative explanations for our findings using economic specialization, religion, language, geographical location, and economic size as possible causes. Our main providers of information were the Swiss Statistical Office and the Statistical Office of each canton. Data are available upon request.

4. The Pearson correlation coefficient is usually designated simply by correlation coefficient.

5. Results are available upon request.

6. Sorensen & Whitta-Jacobsen (2005) and the seminal work of Burns & Mitchell (1946) are good references for business cycle length.

7. Notice, however, that computation of the output gap was performed only once, using the full sample.

8. The GMM method is used when one suspects problems of endogeneity between explanatory variables. The correlation coefficient implies a relationship, positive or negative, between two variables, so by definition of this statistic, there is endogeneity between these two variables. We use the GMM to estimate this statistic and also the associated standard error.

9. In this sense, we classify a canton as German or French speaking only if the most important language of the canton is one of these, as can be seen in Table B1 of Appendix B. We cannot calculate average bilateral correlations for Italian speaking cantons because there is only one—Ticino. Hence, we have removed five cantons from this analysis, representing 21.7% of Switzerland's GDP. Regarding religion, when there are two, the canton is classified according to the greater percentage. We have removed three cantons from the analysis (representing 14.3% of Switzerland's GDP), as no prevailing religious faith can be identified in them. In the column ‘All Cantons’, results are for the 26 cantons.

10. Grier (1997) is a more recent reference on this topic.