How to Explain the High Pries in Switzerland?
Christoph Sax and Rolf Weder∗
May 2009
preliminary version
Abstrat
This paper establishes and empirially analyzes a simple model that explains hanges in the relative prie level of ountries, and thus in the real
exhange rate, based on the interation between a tradable and a nontradable setor. We test the model in a panel of 22 ountries from 1970
to 2004 and nd that hanges in the terms of trade and openness, and to
a minor extent in government expenditures and the urrent aount, explain the movements in the Swiss real exhange rate well over the last 35
years. Changes in regulations and relative produtivities perform poorly.
This hallenges the ommon view that a lak of ompetition and a high
level of regulations are the main auses of Switzerland's high pries.
J.E.L. Classiation: F14, N74 Key Words: Terms of Trade, Prie Level,
Non-Traded Goods, Balassa-Samuelson
1
Introdution
Switzerland is one of the most expensive ountries in the world.
By the end
of 2007, the prie of a Big Ma was CHF 6.30 in Switzerland, while the same
produt in Germany was EUR 3.10 (CHF 5.10), 23.3 % less than in Switzerland.
Aording to the Big Ma Index of July 2008, a global survey of Big Ma pries
by The Eonomist, Switzerland has shown the third highest prie (USD 6.36),
beaten only by Norway (USD 7.88) and Sweden (USD 6.37). In the Euro Area,
a Big Ma was 16 % heaper (USD 5.34) and in the US 44 % heaper (USD 3.57)
than in Switzerland.
Not only Big Mas are expensive; Prümmer (2002), for
example, has ompared pries for dierent goods in Switzerland and Germany
and found even more extreme examples:
or an AEG-washing mahine (+109 %).
Nivea (+86 %), Toblerone (+53 %)
However, not all produts are more
expensive in Switzerland. In the beginning of September 2008, Apple's heapest
iMa has been sold for CHF 1499.00 in Switzerland, 7 % heaper than the same
produt in Germany (EUR 999.00 or approximately CHF 1605).
This last example seems to be an illustration of the law of one prie. Idential goods, the law states, should be sold at the same prie at dierent plaes, provided that transport osts are negligible and that there are no loation-spei
additional osts.
In the ase of an online-sold omputer, both onditions are
∗ Faulty of Business and Eonomis, University of Basel, Switzerland.
Corresponding
Author: Rolf Weder, Faulty of Business and Eonomis, University of Basel, Peter MerianWeg 6, CH-4002 Basel, Tel: +41 (0)61 267 33 55, Email: rolf.wederunibas.h.
1
INTRODUCTION
2
nearly fullled, so that the remaining prie dierential an mainly be explained
by the dierenes in the value-added tax.
For other goods, suh as Big Mas, this law of one prie does not and annot
be expeted to hold. Contrary to the iMa, there are signiant loation-spei
osts for the Big Ma. Labor and rent may be important parts of a Big Ma's
total osts. Additionally, the very low tradeability of a warm Big Ma aross
borders does not require a loal MDonald's to harge the same prie as demanded abroad and, in addition, may provide the rm with some monopoly
power that an be used to harge pries above marginal osts. This, in turn,
depends on the degree of loal ompetition between suppliers of lose substitutes to a hamburger. The iMa versus Big Ma lesson is a general one: the
less tradable a good is, the bigger one would expet prie dierentials to be.
There is an inreasing debate and omplaint regarding high pries in Switzerland sine the 1990s. This has led the State Seretariat for Foreign Aairs (Seo)
1
to publish a study on the Swiss Prie Island.
First, the study olleted on-
sumer pries of 50 omparable produts oered in a omparable store in Switzerland and the neighbouring ountries Germany, Italy and Frane. Pries were
olleted in Otober 2005 and again in February 2008.
As one third of the
produts turned out to be heaper in Switzerland, the study onludes that
this analysis qualies the piture of the prie island Switzerland, but does
2
not overturn it.
In gure 9 and 10 in the appendix we have alulated, for
a number of produts, the unweighted average prie index in the neighbouring
ountries in omparison with that in Switzerland in 2005 and 2008, respetively.
The analysis implies that there are onsiderable prie dierenes and also prie
hanges for individual produts.
Note that, in 2005, a Salami (Tipo Milano)
was 40 % heaper in the neighbouring ountries whereas, on the other side of
the spetrum, a CD was 40 % more expensive in these ountries. Also note that,
in 2008, the prie dierenes for these extreme ases, and also in general, were
less pronouned. However, for some produts they, in fat, inreased. Take a
TV set for whih pries in Switzerland were around 10 % higher in 2005 and,
for a newer type of TV, around 20 % lower in 2008.
Seond, on a more aggregated level the study presents omparative prie level
indies, i.e. relative pries of aggregates of the Gross Domesti Produt (GDP).
Table 4 in the appendix reprodues the prie level of Switzerland relative to the
average of the EU15 for 14 aggregates and the years 1995 and 2006. The table
shows that, on this more aggregated level, pries were higher in Switzerland in
all ateogries in 1995, though at dierent degrees. Pries were relatively highest
in the area of housing, water, eletriity, gas and other fuels, eduation,
health and onstrution, whih all inlude a onsiderable share of servies.
Table 4 also shows that pries onsiderably dereased between 1995 and 2006
relative to the EU15 average. Note that the relative prie derease was strongest
in the areas of eduation, housing et al., aloholi beverages, tabao and
nartois as well as restaurants and hotels.
3
1 SECO (2008), the study is published in German language with the title Preisinsel
Shweiz.
2 Authors' translation of SECO (2008, p. 53).
3 It is interesting to note that a reent study by Borhert (2008) omparing pries of on-
sumer eletronis and household applianes for the EU27 and 3 additional ountries inluding
Switzerland found that, in 2007, Swiss pries for onsumer eletronis were 10 % below the
EU27 average and the third lowest among the 30 ountries, and only 4 % above the EU27
average for applianes.
1
INTRODUCTION
3
Third, on a highly aggregated level Eurostat also alulates omparative
prie level indies for nal household onsumption. Figure 11 in the appendix
shows that, overall, Switzerland is an expensive ountry with pries of goods
and servies onsumed by households being approximately 25 % higher than in
the EU27 average in 2007.
4
Even in omparison with Germany and Frane,
pries were approximately 20 % higher. Figure 11 onrms that, overall, pries
did fall in Switzerland relative to those in the European ountries during the last
ve years. This is largely due to the appreiation of the Euro by approximately
13 % from 2002 to 2007. The report by SECO (2008) onludes that the need
for eonomi poliy ation remains on a broad front, partiularly in the area
of servies (p. 46).
What are the proposed poliy onlusions? SECO (2008, pp. 9) alludes to (i)
strenghtening the ompetition poliy, (ii) reduing non-tari barriers to trade
(e.g. with the unilateral introdution of the Cassis de Dijon priniple), (iii)
opening up trade in agriultural produts (e.g. based on a bilateral free trade
agreement with the European Union) and (iv) liberalizing and deregulating the
market for servies. This line of reasoning promotes the popular pereption that
there is a lak of ompetition and an abundane of protetionisti regulations
in Switzerland that are responsible for the high pries. This view has a long
tradition as an be seen from quotes e.g. from the OECD (1992): Widespread
horizontal and vertial ollusive arrangements may have ontributed to higher
and more rigid pries than in omparable European ountries (. . . ).
(p. 68)
and High domesti prie levels in Switzerland may point out the sope of nonompetitive priing behavior in eonomy.(p. 82).
5
Sometimes the argumenta-
tion is not free of irular logi, as in the following quote by OECD (2000, p. 76),
where evidene of the lak of ompetition is drawn from the existene of high
pries: Although it is inherently diult to gauge the degree of ompetition in
an eonomy, international omparisons of prie levels (. . . ) arrive at pries in
Switzerland that are substantially higher than most other OECD ountries.
Eonomi poliy onlusions are made: open up the eonomy, deregulate,
implement a tougher ompetition poliy andif all of this annot be done
6
possibly join the European Union in order to be fored to do it.
If all of this
is implemented, so the argument, pries in Switzerland should fall towards the
European level.
We (and e.g. Lutz 2005) remain septial for a number of reasons. First of
all, we believe that a thorough analysis of the reasons for the relatively high
pries is still laking. There is always a danger to postulate poliy remedies before the true auses of a deplorable state of aairs are known. Note that many
of the above mentioned poliy proposals may well be reasonable (e.g. opening
4 In Comparison with the EU15, pries would be 20 % higher.
5 Another quote in this respet omes from SECO (2008): Zusammengefasst ist aus unserer Siht zu sagen, dass die Last der Wettbewerbsbedingungen und staatlihen Regelungen
ein Teil der Erklärung dafür sind, dass die Shweiz in Bezug auf Preise eine wenig vorteilhafte Stellung einnimmt. (p. 34) or Brunetti (2003) Internationale Preisvergleihe zeigen,
dass der Wettbewerb in der Shweiz in vielen Bereihen nah wie vor relativ shwah ist.
Eine Verbesserung ersheint hier deshalb besonders wihtig, weil mehr Wettbewerb niht nur
die Preise senkt, sondern auh Druk zu dauernden produktivitätssteigernden Innovationen
aufbaut. (p. 29).
6 A study by Infras (2003, p. 21) emphasizes a loser integration of the Swiss market with
the European market and an inrease in ompetition between the agents in the individual
goods markets in Switzerland (Authors' translation).
2
STYLIZED FACTS
4
up markets); the open question is whether they an primarily be defended from
the perspetive of reduing the prie level. Seond, the argumentation ignores,
in our view, the timing of the problem. The disussion impliitly seems to assume that the high prie level of Switzerland is the result of a newer eonomi
development during the last 10 to 15 years. As we will show below, there are
good reasons for doubt regarding this point. Third, the extent of the relevant
regulation dierential may be muh smaller than suggested by the literature
ited above. Note that some European ountries may well have similar regulation levels as Switzerland. Fourth, we doubt whether being a member of the
European Union with its more ative ompetion poliy would make a dierene.
There are EU members suh as Norway, Denmark or Finland that show prie
levels lose to that of Switzerland. Fifth, the prie dierential itself may be overestimated. Aording to this fundamental argument, some of the dierenes in
pries may be due to dierenes in quality. Although some of the data we use
laim to onsider suh dierenes in quality, they eventually may not aount
for the full amount.
In this paper, we therefore want to have a loser look at the determinants
of the relatively high pries of Switzerland. We believe that a large part of the
overall relative prie level of a ountry is determined by the domesti osts of
using labor and land in the prodution of servies and goods that are not or
only partially tradable internationally. So, we need an approah that expliitly
takes into aount that not all goods are internationally tradable. Furthermore,
we want to onsider hanges in the terms of trade as these already proved to be
important in explaing the relatively low growth rate for Switzerland as shown
by Kohli (2004).
The reason is that an inrease in a ountry's export pries
due to hanges in global demand and supply may have a similar eet on wages
and thus the domesti prie level as an inrease in produtivity in the export
setor, the latter of whih has been emphasized by Balassa (1964) and Samuelson
(1964).
The paper is strutured as follows. In Setion 2, we present some stylized
fats that support our laim that we should move beyond the urrent popular
view that the high pries in Switzerland are due to a lak of ompetition and a
high level of regulation. In Setion 3, we present a small stati model suitable to
apture the important ingredients to understand the Swiss ase. The model has
been inuened by De Gregorio and Wolf (1994). Setion 4 empirially analyzes
the main hypotheses derived from the model and disusses some additional
fators that may be important in the explanation of the development of Swiss
pries. Setion 5 onludes.
2
Stylized Fats
When we determine relative pries or the relative prie level of ountries, we
prinipally alulate a real exhange rate. In the following, we dene the real
exhange rate
Q
as the relative prie level of a foreign ountry ompared to
home's (e.g. Switzerland's) expressed in the same urreny. Formally
Q=
where
P∗
EP ∗
,
P
is the prie level of the foreign ountry,
ountry, and
E
(1)
P
is the prie level of the home
is the nominal exhange rate (dened as the prie of the foreign
0
1
2
3
4
5
6
0.5
1.0
1.5
2.0
2.5
3.0
2
0.4
STYLIZED FACTS
5
1.8
Swiss Real Exhange Rate (PPP), 1950 - 2004
USA
GER
1.6
AUT
FRA
1995
1.4
0.8
ITA
JPN
1.2
1985
DNK
1.0
Real Exhange Rate
1975
0.6
CHE
1950
1960
1970
Figure 1:
1980
1990
2000
Real exhange rate
urreny in units of the domesti urreny).
A derease in
Q
implies a real
appreiation of the domesti urreny and thus a relative inrease of domesti
pries.
Figure 1 plots the Swiss real exhange rate from 1950 to 2004 towards several
ountries.
Thus, we go beyond the short-term view of relative prie hanges
from 1996 to 2007 aptured by gure 11 and dene the real exhange rate
as the inverse ratio of the omparative prie level indies in gure 11.
Note
that the real exhange rate dened in equation (1) an easily be omputed in
pratie by dividing the market exhange rate of eah ountry (E ) through
∗
ountries' purhasing power parities equal to P/P . Figure 1 implies that in
the late seventies, there is some real appreiation of the Swiss fran towards its
neighbours and, between 1960 and 1980, towards the United States and Japan.
Overall, the piture suggests that there is some real appreiation of the Swiss
fran from 1960 to 2000, whih implies that, over the whole period, Swiss pries
did inrease substantially relative to foreign pries.
A seond fat to look at is the development of the nominal exhange rate
depited in gure 2 for several ountries. If one ompares gure 2 with gure 1,
one an make several striking observations. The nominal exhange rate volatility
literally explodes after the ollapse of the xed exhange rate regime.
Until
1973, nominal exhange rates towards other ountries moved only slightly due
to the Breton Woods system.
Sine prie level volatility is small, there is a
strong orrelation between the short-term movements of the nominal and the
real exhange rate after the ollapse. Therefore, note that the real appreiation
mentioned above during the 1970s seems to be largely driven by the nominal
appreiation, whih, in turn, is linked to the breakdown of the Bretton Woods
system. There are several explanations for this sudden appreiation.
7 Aording to the
safe haven
7
hypothesis, the Swiss fran was strengthened by the fat
that investors wanted to park their investments in an apparently safe urreny. The
diversiation
portfolio-
hypothesis, on the other hand, sees the Swiss fran strengthening beause
investors had an additional urreny to diversify their portfolios after the fall of Bretton
Woods. See Kugler and Weder (2004, 2005) and Sheller (2005).
0
1
2
3
4
5
6
1.0
2.0
2.5
3.0
2
0.4
STYLIZED FACTS
6
0.6
0.8
1.2
Index of Nominal Exhange Rate, 1950 - 2004, Base-Year: 1973
1.4
1.6
1.8
USA
1.5
index of nominal exhange rate
GER
AUT
FRA
DNK
1975
JPN
1985
1.0
1995
CHE
0.5
ITA
1950
1960
1970
Figure 2:
1980
1990
2000
Nominal Exhange Rates
As mentioned in the introdution, there is onsiderable evidene that the
pries of the non-tradable goods and servies are higher in Switzerland than
in other ountries (e.g. apartment rents or restaurant servies). This may be
largely due to a general phenomenon whih implies that relatively rih ountries
tend to have relatively high pries.
Explanations go bak to Balassa (1964)
and Samuelson (1964) as well as to Kravis and Lipsey (1984) and Bhagwati
(1984). For 36 mainly European ountries, gure 3 plots the omparative prie
level indies (EU27=100) for 1997 to 2007 in relationship to the real GDP p..
index (EU27=100). Figure 3 onrms that there is strong positive relationship
between these two variables. Interestingly, Switzerland is loated in the middle
of the loud of dots and thus does not show any anomalies relative to the
other ountries. Luxembourg, on the other hand, seems to be an outlier.
8
This
strongly suggests to fous our analysis on a model that expliitly takes into
aount non-tradables and allows for dierent produtivities in the exporting
setor.
Finally note that there is strong evidene emphasized by Kohli (2004) that
the terms of trade of Switzerland improved over the last deades.
Whereas
Kohli uses this information to argue that growth rates based on hanges in GDP
onsiderably underestimate the inrease in the standard of living in ountries
like Switzerland, we take terms of trade eets into aount when exlaining
hanges in prie levels and thus in real exhange rates.
Figure 4 shows that
Switzerland's terms of trade greatly improved sine the seventies. There is no
other ountry in the OECD with a similar improvement of the terms of trade.
In Setion 3, we now develop a model that allows us to apture the terms
of trade and losely related eets on the relative prie level and thus the real
exhange rate of a small ountry. Thereby, we partiularly fous on the relationship between tradable and non-tradable goods as this seems to be at the
heart of the question we intend to analyse in this paper, given the stylized fats
8 We prefer this explanation rather than the one proposed by SECO (2008, p. 8):the example of Luxembourg shows that even with a high inome a prie level of that of neighbouring
ountries is possible (authors' translation)
2
STYLIZED FACTS
7
PSfrag replaements
Japan
1
140
2
3
Schweiz
4
Norwegen
Island
Dänemark
5
6
120
0.5
Comp. Price Level / EU27 = 100
1.0
2.5
3.0
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1950
Irland
Vereinigtes Königreich
Frankreich
Deutschland
Belgien
Niederlande
Österreich
Italien
100
2.0
Finnland
Schweden
Vereinigte Staaten
Luxemburg
Zypern
Spanien
Griechenland
Portugal
80
1.5
Slowenien
Malta
1960
1970
Kroatien
1975
60
PSfrag replaements
1980
Türkei Estland
1985
0
Polen
Lettland
Ungarn
1990
1
Litauen
1995
2
Tschechische Republik
Slowakei
2000
3
Rumänien
Mazedonien, ehemalige jugoslawische Republik
40
USA
4
GER
5
Bulgarien
ITA
6
FRA
0.5
50
0
AUT
1.0
JPN
1.5
100
150
200
250
300
GDP per cap. / EU27 = 100
CHE
2.0
DNK
2.5
3.0
0.4
Figure 3:
Comparative Prie Level and GDP (average values 1997 to 2007) (E27=100),
Soure: Eurostat.
1.4
terms of trade
1.6
1.8
CHE
GER
1960
ITA
1.2
JPN
1.0
USA
0.8
pries of exports / imports
1950
FRA
0.6
AUT
DNK
1970
1975
1980
Figure 4:
1985
Terms of Trade
1990
1995
2000
3
8
A SIMPLE MODEL OF RELATIVE PRICE LEVEL DETERMINATION
desribed above.
3
A Simple Model of Relative Prie Level Determination
We use the denition of the real exhange rate,
that the prie level,
P,
Q,
from Setion 2 and assume
of a ountry is equal to a (geometrially) weighted
average of the prie of traded,
PT ,
and nontraded,
the weight of the traded (nontraded) goods.
9
PN ,
goods where
1 − s (s )
is
To simplify, we assume that the
weights are idential in both ountries. For the home ountry, the real exhange
rate is thus equal to
Q=
A derease in
Q
EP ∗
EPT∗ 1−s PN∗ s
.
=
P
PT1−s PNs
(2)
implies a relative derease (inrease) in the foreign (home)
prie level, i.e. a real appreiation of the home ountry's urreny. Note that a
redution of
Q also implies an inrease in the purhasing power of domesti goods
over foreign goods.
They beome more expensive and thus buy more foreign
goods. We rewrite equation (2) to make use of purhasing power parity (PPP),
10
whih an only be expeted, if at all, to hold for traded goods.
PT∗ /PT and olleting terms leads to:
Q=
EPT∗
PT
PT PN∗
PN PT∗
s
Fatoring out
.
(3)
Note that the term in the rst braket is equal to one (does not hange)
if absolute (relative) PPP holds.
The seond braket term reveals that the
real exhange rate is aeted by relative hanges in the prie of traded and
non-traded goods in the home and the foreign ountry. If the relative prie of
non-traded goods rises in the home ountry and if this inrease is larger than
in the foreign ountry, the real exhange rate falls as expeted. Thus, equation
(3) reveals that the real exhange rate is aeted by a relative prie hange of
traded and non-traded goods in the long term and may hange in the short-term
when the nominal exhange rate deviates from PPP. The question then arises
what fores may aet relative pries of traded and non-traded goods.
It is well known from studies by Balassa (1964) and Samuelson (1964) that
absolute dierenes between ountries in the produtivity of the traded goods
setor may be responsible for dierenes in the relative prie of traded and nontraded goods. The analyses by Kravis and Lipsey (1984) and Bhagwati (1984)
point in a similar diretion using the fat that ountries with large per-apita
inome tend to be relatively well endowed with apital. If fator-prie equalization does not hold, these ountries tend to experiene relatively high real
wages, whih, in turn, inrease the relative prie of non-traded goods. By simplifying and extending De Gregorio and Wolf (1994), we develop a stati model
9 Note that non-traded goods inlude a wide variety of goods and servies typially produed
in an eonomy. These inlude items suh as onstrution, repair, health servies, eduation,
restaurants and publi servies. A rough estimate based on the national prodution aount
implies that non-traded goods and servies reet a substantial share of total output. In ase
of Switzerland, the share is likely to be in the order of 50% of GDP. Note that Krugman and
Obstfeld (2006, p. 384) mention a number of 56% for the US referring to the share of servies
and onstrution in gross national produt.
10 See also Chinn (2000, p. 21)
3
A SIMPLE MODEL OF RELATIVE PRICE LEVEL DETERMINATION
9
that shows the interation between relative pries and (i) setoral produtivity, (ii) the terms of trade, (iii) government spending and (iv) urrent aount
imbalanes, whih will allow us to link the results losely to equation 3.
It is important to note that in order to study how hanges in the terms
of trade aet relative pries and thus the real exhange rate, it is neessary
to distinguish between exports and imports and their orresponding pries. An
extreme way of apturing the eets of a hange of the terms of trade is to assume
that ountries produe the export good for the world market only (there is no
domesti onsumption of this good) and that they do not produe the import
good whih is only onsumed domestially.
11
The quantity of exports (YX ) will
thus be traded for the quantity of imports (YM ). We x the prie of imports to
unity (PM
= 1),
so that all other pries are reeted in units of imports. The
terms of trade are thus equal to
PX .
In Subsetion 3.1 we establish the model
that explains hanges in the relative prie of non-traded goods. Subsetion 3.2
derives and disusses the omparative statis results. Subsetion 3.3 relates the
results to equation (3).
3.1
The Model
Suppose there is a small eonomy that produes quantities of two homogeneous
goods, exports (YX ) of good
a non-traded good
X
and domestially onsumed quantities (YN ) of
N.
Exports are assumed to be produed with apital and
1−α
α
labor and desribed by a Cobb-Douglas funtion, YX = AX LX KX , where
0 < α ≤ 1 and AX aptures the level of tehnology. Assuming that the apital
stok is spei to this industry and xed, the prodution funtion of exports
simplies to
1−α
YX = ϕX Lα
X , where ϕX ≡ AX K̄X .
Note that
ϕX
(4)
is a produtivity parameter determined by the level of tehnol-
ogy and the amount of available apital in the export industry. Dierentiating
the prodution funtion with respet to
prie of exports
PX
LX
and multiplying the result by the
(denoted in units of imports) leads to a diminishing value
of the marginal produt of labor (VMPLX ) that, in equilibrium, has to be equal
to the wage rate in the export setor
wX =
wX .
Thus,
αϕX
PX .
L1−α
X
(5)
The prodution of non-tradables only requires labor as an input and is assumed to be linear in the quantity of labor used (LN ).
YN = ϕN LN .
12
Thus,
(6)
The value of the marginal produt of labor in the N-setor (VMPLN ) is nondiminishing and equals the average produtivity,
ϕN ,
multiplied by the prie of
non-tradables (again in terms of units of imports). In equilibrium, it is equal to
the wage rate:
11 This assumed struture of the model seems to be defendable based on the observation that
ountries typially export a small number of goods that are only to small extent onsumed
domestially and import a large number of goods that may hardly be produed domestially.
12 Assuming a diminishing marginal produt also in this setor would make the model more
omplex to solve, but not hange the main results.
1
2
3
4
5
6
0.5
1.0
1.5
2.0
2.5
3.0
0.4
3
0.6
A SIMPLE MODEL OF RELATIVE PRICE LEVEL DETERMINATION
10
0.8
1.0
1.2
1.4
1.6
1.8
1950
1960
wX
1970
wN
1975
1980
1985
1990
VMPLX
1995
2000
USA
GER
VMPLN
ITA
ϕN PN
FRA
AUT
JPN
CHE
ϕX
1−α
X
DNK
L
LX
PX
LN
Figure 5:
Equilibrium in the labor market
wN = ϕN PN .
(7)
An equilibrium in the labor market requires that
wN = wX .
Setting equa-
tions 5 and 7 equal, we get:
LX
ϕX PX
= α
ϕN PN
The employment in the export setor
1
1−α
LX
.
(8)
is, therefore, determined by the
relative prie of exports and non-tradables and the exogenous variables desribing the tehnologies. Sine we assume an inelasti labor supply (LX
+ LN = L̄),
equation (8) determines employment and prodution in both setors for a given
relative prie of the goods produed. Figure 5 desribes the labor market equilibrium for a given relative prie of exports and set of parameters.
A tehnologial progress in the export setor and/or an inrease in the prie
for exports raises the value of the marginal produt of labor in this setor and
shifts
VMPLX
to the right. As wages beome higher in the export setor, labor
is attrated. This raises
onstant
VMPLN
LX
and redues the
VMPLX .
Note that due to the
the wage rate remains unaeted unless the prie of the non-
tradable good also hanges. Employment in the non-tradables setor beomes
LX
VMPLX .
residual in this model as
is fully determined by the equilibrium wage rate
and the diminishing
If the labor endowment
aordingly while
LX
(L̄)
rises,
LN
inreases
remains unaeted, eteris paribus. To understand how
the relative prie of exports and non-tradables is determined and how hanges
in the parameters of the model aet the equilibrium, we need to introdue the
onsumption side of the eonomy.
3
11
A SIMPLE MODEL OF RELATIVE PRICE LEVEL DETERMINATION
Consumers are assumed to spend their inome (I ) on quantities of the nontradable good (CN ) and the import good (CM ) to maximize the following
Leontief-utility funtion:
U = min(CN , CM ).
(9)
We hoose this speial ase of a CES-utility funtion beause it onsiderably
simplies the algebra without reduing the insights. This assumption implies
that we do not have to worry about substitution eets as the two goods are
always onsumed in equal quantities (CN
= CM ).
Changes in relative pries
aet onsumption of the two goods only through an inome eet.
We also introdue the government who ollets taxes
T
from the onsumers
(i.e. a lump sum tax) denoted in terms of imports. We assume that the government exlusively uses the tax revenue to purhase the non-tradable good of
the quantity
GN .
This is an extreme assumption to apture the empirial evi-
dene that relative to private spending, government spending tends to fall more
heavily on non-traded goods (Rogo 1996, p. 663). Similarly, a urrent aount
imbalane
CA in terms of the imported good an be introdued by noting that a
CA < 0, implies a net apital inow whih inreases
urrent aount deit, i.e.
the inome to be spent on non-tradables and imports. As argued by Krugman
(1990) this transfer of wealth is likely to aet relative pries due to dierent
onsumption patterns.
Aggregate demand for non-tradables
DN
an now be determined; it is om-
posed of the demand by households and the government. Given that the quantity of imports
CM
and non-tradables
CN
onsumed by households is equal,
CN
is simply determined by the eonomy's apability to produe imports through
exports, i.e.
PX YX .
Government demand for non-tradables is equal to
GN .
The sum of these two omponents is nally redued by a possible urrent aount surplus
CA or, in other words, a net apital outow that redues domesti
demand for non-tradables. Thus,
DN = PX YX + GN − CA.
(10)
Note that aggregate demand an expliitly be derived by utility maximization of the onsumers subjet to their budget onstraint (I
= PX YX + PN YN −
T − CA) and the onstraints that government expenditures are equal to taxes
(GN PN = T ) and onsumption of imports is equal to exports minus the urrent
13
aount surplus (CM = PX YX − CA).
An inrease in the government budget, the urrent aount deit (i.e. in the
apital imports) or the value of prodution of exports raises aggregate demand
for non-tradables. Note that we an replae YX by the prodution funtion of
α
exports, i.e. YX = ϕX LX . Aggregate demand an then be rewritten as:
DN = PX ϕX Lα
X + GN − CA.
(12)
Supply of N depends on the residual amount of labor to be used in the nontradable setor. Using the prodution funtion and the labor market onstraint,
supply is therefore equal to
13 The aggregate demand funtion for non-tradables is equal to
DN =
YX PX + YN PN − T − CA
+ GN .
PN + 1
(11)
3
12
A SIMPLE MODEL OF RELATIVE PRICE LEVEL DETERMINATION
YN = ϕN L̄ − ϕN LX .
(13)
Note that the general equilibrium requires that, rst, the labor market is
in equilibrium, i.e.
VMPLX = VMPLN , and that, seond, the goods market
DN = YN . We now disuss this equilibrium and the
is in equilibrium, i.e.
omparative statis of it.
Thereby, the main interest is in how the prie of
non-tradables is aeted by hanges in the eonomi environment.
3.2
Comparative Statis
Figure 6 desribes the general equilibrium, whih ombines the labor market
equilibrium (gure 5) with the goods market equilibrium desribed above. Let
us start with the lower part of gure 6, whih illustrates demand (DN ) for and
supply (YN ) of non-tradables, dependent on the amount of labor that is used
in the export industry (LX ). Supply is linear and dereasing in
for N is an inreasing funtion of
diminishing
MPLX ;
LX ,
LX .
Demand
albeit at a diminishing rate, due to the
It reets the implied demand urve for N due to inreased
availability of imports through the prodution of exports. Equilibrium is assoiated with a ertain alloation of
LN
and
LX
to exports and non-tradables,
respetively. The upper part of gure Y repliates the labor market equilibrium
desribed in gure 5). Note that the prie of exports is exogenous, whereas
PN
is endogenously determined through demand and supply in the tradables setor.
We now turn to the omparative statis of the model. Suppose that we are
in a general equilibrium. We disuss the eets of (i) a hange in produtivity
in the export industry, (ii) a hange in the terms of trade, (iii) a hange in
government spending and (iv) a hange in the urrent aount balane.
Produtivity in Export Setor Produtivity hanges work along the lines
proposed by Balassa (1964) and Samuelson (1964). An improvement of
the produtivity in the export setor leads to a downward shift of the
demand urve and a shift to the right of the
lines).
VMPLX
in gure 6 (dotted
At the original alloation of labor to exports and non-tradables
there is an exess demand for non-tradables due to the higher inome and
thus availability of imports. This leads to an inrease in the prie of nontradables and thus raises
LN
and thus the supply of non-tradables along
the supply urve in the lower part of gure 6). The new equilibrium is
haraterized by a larger demand for and supply of non-tradables as shown
by point A, a lower (larger) alloation of labor in the X setor (N setor)
′
and a higher prie of non-tradables (PN ) as shown by point B. Note that
the non-tradables setor expands and the export setor shrinks due to
the tehnologial progress in the export setor. Nominal wages inrease
proportionally to
PN .
Most importantly for our analysis, the inrease in
produtivity in the export setor is assoiated with higher wages and a
higher relative prie for non-tradables, the so-alled Balassa-Samuelson
eet.
Terms of Trade An inrease in the terms of trade is aptured by an inrease
in the relative prie of exports, i.e. an inrease in
PX .
This, again, shifts
PSfrag replaements
0
1
2
3
4
5
3
A SIMPLE MODEL OF RELATIVE PRICE LEVEL DETERMINATION
6
0.5
1.0
1.5
2.0
2.5
3.0
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1950
1960
1970
wX
wN
1975
1980
VMPL′X
1985
B
1990
′
ϕN P N
1995
2000
USA
VMPLX
GER
C
ITA
ϕN P N
FRA
AUT
JPN
CHE
DNK
0
LN
LX
S
A
ϕN L̄
D
D′
DN , YN
Figure 6:
Equilibrium in the labor market and in the market for non-tradables
13
3
A SIMPLE MODEL OF RELATIVE PRICE LEVEL DETERMINATION
demand downwards and the
VMPLX
14
to the right. The new equilibrium is
again haraterized by a higher prie for non-tradables,
PN ,
and may be
equal to the equilibrium desribed above (points A and B) depending on
the size of the terms of trade improvement. Thus, an improvement of the
terms of trade works similarly to the Balassa-Samuelson eet and an, in
our model, be interpreted as a kind of tehnologial progress in the export
setor as it allows to inrease imports per unit of labor used in exports.
The inrease in imports raises demand for the non-tradable good and thus
the prie of it.
Government Expenditures An inrease in government spending inreases
demand for non-tradables and thus shifts demand downward in gure 6).
The
VMPLX
remains unaeted. The inrease in the government budget
raises demand for non-tradables as the government buys relatively more
of the non-tradable good than the households (in our model it only buys
N). If this inrease in demand shifts the demand urve down to D', the
new equilibrium in the labor market is aptured by point C. Note that the
prie of non-tradables inreases though to a smaller extent than before.
This is due to the fat that there is no inrease in the
ompensated by a further inrease in
VMPLX
to be
PN .
Current Aount An inrease in the urrent aount deit allows the do-
mesti ountry to spend more than what it earns (from the prodution
of non-tradables and exports) on non-tradables and imports. An inrease
in the urrent aount deit shifts the demand urve for non-tradables
downwards. As more is obtained in terms of imports for a given quantity
of exports, the eonomy wishes to onsume more non-tradables; this leads
to an exess demand at the given prie of non-tradables.
PN
thus rises
and with it the wage rate. This inreases the quantity of non-tradables
produed. In the new equilibrium, the relative prie of nontradables,
PN ,
wages as well as the output of non-tradables all have inreased, whereas
the output of exports is lower than before. If the inrease in the urrent
aount deit (or a redution in the surplus) shifts demand to D', the
14
new labor-market equilibrium would be in point C.
3.3
Relating the Results with the Real Exhange Rate
The analysis in subsetion 3.2 showed that, in our model, the (relative) prie
of nontradables
PN
rises with (i) an inrease in the produtivity in the export
setor (ϕX ), (ii) an improvement of the terms of trade (PX ), (iii) an inrease in
the government expenditures (GN ) and (iv) a derease in the urrent aount
surplus (CA). This an be summarized by the following equation:
PN = f
ϕX , PX , GN , CA .
+
+
+
−
(14)
These results an be linked to equation (3). If we assume that PPP applies
for traded goods (in the long term), the rst braket term in equation (3) is
14 It an be shown that, with perfet international mobility of apital, it is only hanges in
produtivity and hanges in the terms of trade that aet the relative prie of non-tradables.
4
15
EMPIRICAL ANALYSIS
equal to one. Taking into aount that the prie of tradables is equal to
PX
in
our model as X is the only good produed, we an onlude that the model's
preditions are as follows: the real exhange rate falls and thus relative pries
in the home ountry rise if, eteris paribus, (i) the relative produtivity in the
export setor rises more in the home ountry than abroad, (ii) the terms of trade
rise (overall) more in the home ountry than abroad, (iii) there is a relative
inrease of government expenditures in the home ountry or (iv) the urrent
aount deit inreases more in the home than in the foreign ountry (or a
surplus inreases less at home). As all these hanges aet the real exhange
rate through a hange in the relative prie of non-traded goods, we assume
that they are all weighted with the share of nontradables in the aggregate prie
index. All of this, inluding the fat that the nominal exhange rate may not
follow PPP in the short run, will have to be taken into aount in the empirial
analyses. Thus,


 ϕX PX GN CA 
Q= ∗ , ∗, ∗ ,
.
ϕX PX GN CA∗
−
4
−
−
(15)
+
Empirial Analysis
In this setion we try empirially to asses our model, using panel data from 1970
to 2004 for 22 OECD ountries. We rst desribe the methodology in setion
4.1 and the data in setion 4.2. The results are given in setion 4.3. Setion 4.4
reexamines the ase of Switzerland based on these results.
4.1
Methodology
We estimate a redued form of our model, linking the explanatory variables
diretly to the real exhange rate. We start with the following baseline model:
∆ log(Qit ) = β1 ∆
∆ log(Qit )
Git
CAit
+ β2 ∆
+ β3 ∆ log(Px it ) + αt + eit .
Yit
Yit
denotes hanges in the eetive real exhange rate.
(16)
Our baseline
model inludes the explanatory variables from the model, with the exeption
of the produtivity dierentials:
government share;
∆(CAit /Yit )
∆(Git /Yit )
is the perent-point hange in the
is the perent-point hange in the urrent a-
ount (whih is, as before, dened as a surplus; a deit has a negative sign);
∆ log(Px it ) denotes the perent hange in the ratio of export and import pries;
αt , in order to ontrol for time xed
we also inlude a time spei onstant
eets. Beside ontrolling for unobservable eets that aet all ountries at the
same time (suh as an oil prie shok), suh a term also neutralizes the eet of
the referene ountry. Finally,
eit
denotes the error term.
As there is high auto-orrelation in the time series, we estimate our baseline
speiation in rst dierenes by using ordinary least squares.
We observe
hanges over a yle of 3 years, thereby fousing on a medium-run relationship,
while still preserving a large number of observations.
As a robustness hek, we also inlude ountry dummies, in order to ontrol
for time-invariant unobserved eets. Additionally, we inlude hanges in the
4
nominal exhange rate
∆ log(Eit ),
EMPIRICAL ANALYSIS
16
thereby addressing the problem that PPP
may not hold in the mid-term and that both
∆ log(Q)it
and
∆ log(Px )
may be
aeted by a nominal shok. Finally, we inlude data on produtivity dierentials
∆ log(ϕXit /ϕN it ),
to test for the last explanatory variable of our model.
Unfortunately, data on setor spei labor produtivity is poor, and the sample
is onsiderable redued by this extension. Therefore, as an alternative measure,
we use GDP per apita growth
∆ log(y)
as a proxy for hanges in the produ-
tivity dierentials.
We also try to assess alternative explanatory variables that are not part of
our model. The rst addition is population growth
∆ log(POPit ).
Theoretially,
its eet is ambigous: population growth diretly inreases density and may
inrease the prie of land and rents, thereby dereasing
Q.
Also, it may lead to a
younger demographi struture, thereby shifting demand towards non-tradables,
and dereasing
Q as well (Rose, Supaat, and Braude 2008).
However, in a strit
appliation of our model (the assumption of a onstant apital stok is ruial),
population growth would inrease the labor fore, lowering wages in both setors
and thereby inreasing
Q.
We use two variables as proxies for openness and ompetition. The variable
∆opencit
measures perent-point hanges of the ratio of the sum of imports and
exports of goods and servies to GDP. In a seond speiation, we use hanges
in an index of ompetition regulation
∆compit ,
impat of regulation on real exhange rates.
in order to diretly asses the
Again, the seond variable will
redue the sample size onsiderably.
As an additional test of robustness, we vary the length of our estimations. In
addition to the three-year averages of the baseline model, we estimate a model
using one-, four- and ve-year averages.
4.2
Data
Our estimations over the years from 1970 to 2004 and the 22 major OECD
ountries.
Ieland and Luxembourg have been exluded, as well as the East
European ountries and Turkey and Mexio. A full list of the ountries is in the
appendix.
The OECD provides data on the eetive exhange rate in its Eonomi
Outlook. The same data soure also provides terms of trade data, alulated
as the ratio of export pries and import pries.
From the OECD's National
Aounts we take data on setoral prodution and employment. We dene the
tradable setor as industry only, while the non-tradable onsists of all other
ativities, inluding nanial servies (dening the latter as tradable has no
major impat). The data range of this data is limited, however, and leads to a
redued sample size.
The Penn World Tables provides series on population and GDP-per-apita
(Laspeyres), urrent aount, government share of GDP, and openness (the sum
of imports and exports divided by GDP).
Competition data has been taken from Nioletti and Sarpetta (2001) who
alulate a produt market regulatory index for 21 OECD ountries. The index is based on seven industry sub-indies that reet a rating of the following
dimensions: barriers to entry, publi ownership, market struture, vertial integration and prie ontrols. The detailed soures are reported in the appendix.
4
Table 1:
VARIABLES
∆(Git /Yit )
∆(CAit /Yit )
∆ log(Px it )
EMPIRICAL ANALYSIS
17
Baseline model
(1)
(2)
(3)
(4)
(5)
∆ log(Qit )
∆ log(Qit )
∆ log(Qit )
∆ log(Qit )
∆ log(Qit )
-2.168***
-2.118***
-2.446***
-3.233***
-2.064**
(0.705)
(0.571)
(0.406)
(1.144)
(0.826)
0.839***
0.898***
0.402*
0.830*
0.858***
(0.222)
(0.200)
(0.199)
(0.439)
(0.235)
-0.741***
-0.778***
-0.514***
-0.723***
-0.739***
(0.113)
(0.124)
(0.0661)
(0.146)
(0.115)
∆ log(Eit )
0.466***
(0.0652)
∆ log(ϕXit /ϕNit )
0.158
(0.136)
∆ log(yx )
0.0371
(0.156)
Observations
R2
213
213
213
79
213
0.583
0.621
0.771
0.662
0.583
20
20
Number of id
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
4.3
Results
Our baseline estimation is reported in the rst olumn of Table 1. All oeients
are signiant at the highest level and have the expeted sign: an inrease in
the GDP-share of government expenditure by one perent-point is assoiated
by a real appreiation of 2.168 %, an inrease in the urrent aount surplus
(a derease in the urrent aount deit) by one perent-point leads to a real
depreiation of 0.839 %. Finally, an inrease in the terms of trade by one perent
is assoiated by a real appreiation of 0.741 %.
The inlusion of ountry xed eets in olumn 2 does not aet the results.
The inlusion of the nominal exhange rate (olumn 3) redues the oeient
on the terms of trade and the urrent aount, but leaves both eets signiant
(the latter only at the 10 % level). We an not nd any empirial support for
a produtivity eet: olumn 4 inludes hanges in produtivity dierentials as
measured by the ratio of the labor produtivity in the tradable and non-tradable
setor, olumn 5 the GDP-per-apita growth. Both eets have the wrong sign,
but are not signiantly dierent from zero. The diulty to nd a produtivity
eet is shared by others (e.g. Chinn and Johnston (1996), De Broek and
Sløk (2006) or Kohli and Natal (2008) and Grioli, Meyer, Natal, and Zanetti
(2008), for Switzerland). It ontrasts to the positive ndings of Hsieh (1982) or
De Gregorio and Wolf (1994).
Table 2 reports the results of alternative speiations, inluding variables
that are not part of our model. Openness has a signiant and robust eet on
Q:
an inrease in
of 0.692.
openc by one perent point is assoiated by a real depreiation
An inrease in population, on the other hand, has no signiant
eet on the real exhange rate (olumn 2 and 3).
The same is true for the
regulatory index, whih is inluded in speiation 4. However, as the number
of observations is small and the number of oeients is large, an insigniant
4
Table 2:
EMPIRICAL ANALYSIS
Extensions to the baseline model
(1)
(2)
(3)
(4)
∆ log(Qit )
∆ log(Qit )
∆ log(Qit )
∆ log(Qit )
-1.441**
-2.164***
-1.408**
1.714**
(0.627)
(0.698)
(0.613)
(0.747)
0.595***
0.840***
0.603***
1.177**
(0.209)
(0.226)
(0.210)
(0.489)
∆ log(Px it )
-0.606***
-0.740***
-0.601***
-0.822***
(0.108)
(0.113)
(0.108)
(0.211)
∆opencit
0.692***
VARIABLES
∆(Git /Yit )
∆(CAit /Yit )
18
0.699***
(0.114)
∆ log(POPit )
(0.118)
0.0526
0.314
(0.443)
(0.390)
∆compit
0.0305
(0.0365)
Observations
R2
213
213
213
73
0.677
0.583
0.678
0.590
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
result should not ome as a surprise.
In order to further examine the robustness of these results, we repeat the
estimations with dierent average-lengths. Table 3 shows the baseline speiation inluding the nominal exhange rate for one-, three-, four- and ve-year
averages. The government share, the urrent aount and the terms of trade
eet are similar for all lengths (the urrent aount eet is not signiant in
the ve year estimation, probably due to a lak of observations.). However, if
we estimate the model using one year dierenes (as e.g. De Gregorio and Wolf
(1994), the oeients are smaller. On the other hand, the eet of the nominal
exhange rate dereases over time, whih is onsistent with the idea of long run
monetary neutrality.
4.4
Switzerland, again
With the estimations at hand, we now reonsider the ase of Switzerland's real
appreiation. Figure 7 plots the atual values of hanges in Switzerland's real
eetive exhange rate and the predited values from estimation 1 of table 2,
whih inludes hanges in openness as an explanatory variable.
The atual
values are adjusted by their orresponding time xed eets, so that the depited
value an be interpreted as the deviations from the OECD average at any point
in time.
Overall, hanges in the government share, the urrent aount, the terms
of trade and openness seem to explain the major hanges in Switzerland's real
exhange rate relative to the OECD average pretty well. The strong real appreiation in the early seventies is underestimated by our model, and the model
fails to explain the short depreiation around 1990. However, it explains the
main movements of the real exhange rate over time and espeially the strong
depreiation in the late nineties.
4
Table 3:
VARIABLES
EMPIRICAL ANALYSIS
Dierent time periods
(1)
(2)
(3)
(4)
∆ log(Qit )
∆ log(Qit )
∆ log(Qit )
∆ log(Qit )
1-year
3-year
4-year
5-year
∆(Git /Yit )
-1.709***
-2.442***
-2.098***
-2.582***
(0.316)
(0.597)
(0.675)
(0.740)
∆(CAit /Yit )
0.298***
0.504**
0.592***
0.434
(0.0995)
(0.208)
(0.213)
(0.294)
-0.364***
-0.550***
-0.656***
-0.484***
(0.0495)
(0.0868)
(0.101)
(0.145)
0.486***
0.363***
0.317***
0.255***
(0.0268)
(0.0450)
(0.0586)
(0.0515)
∆ log(Px it )
∆ log(Eit )
Observations
R2
659
213
154
115
0.718
0.718
0.731
0.724
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
PSfrag replaements
0.10
0
1
2
1.5
2.0
2.5
3.0
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1950
1960
1970
0.05
1.0
predicted
0.00
6
0.5
−0.05
5
−0.10
4
changes in eff. rer minus time fixed eff. / predicted values
3
actual
USA
GER
ITA
FRA
1975
AUT
1980
1985
1990
1995
2000
JPN
CHE
DNK
Figure 7:
Atual and predited hanges in Switzerland's real eetive exhange rate
19
4
EMPIRICAL ANALYSIS
20
PSfrag replaements
0.10
0
1
2
1.0
1.5
2.0
2.5
3.0
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1950
1960
1970
openc
0.00
6
0.5
−0.05
5
tot
−0.10
ch. in eff. rer − time f.e. / contributions of tot and openc
4
0.05
3
actual
USA
GER
ITA
FRA
1975
1980
1985
1990
1995
2000
AUT
JPN
CHE
DNK
Figure 8:
Terms of trade and openness as explanatory variables
We an further deompose the predited values into the ontribution of the
individual explanatory variables. Figure 8 depits the ontributions of the terms
of trade and of openness, both heavily ontributing to the utuations of the
real exhange rate. While the terms of trade improved remarkably during the
seventies and between 1985 and 1995, the real exhange rate appreiated during
the same periods. Also, in the early eighties and late nineties, a relative inrease
in openness led to a depreiation of the real exhange rate. Therefore, by using
only openness and the terms of trade, we have a pretty good explanation for
the major movements in Switzerland's real exhange rate over the last 35 years.
On the other hand, hanges in the governmental share and the urrent aount are relatively unimportant, as it is revealed by gure 12 in the appendix.
While these variables are generally important determinants of the real exhange
rate, their deviations from the OECD average is small.
Also, the remaining
variables from our estimations, population growth, export setor produtivity
growth and regulatory hanges, would hardly add value to the explanation of
the hanges in the real exhange rate. Not only are the oeients of these variables insigniant, the hanges in these potential explanatory variables relative
5
CONCLUSION
21
to the OECD average are also minor.
5
Conlusion
This paper establishes and empirially analyzes a simple model that explains
hanges in the relative prie level of ountries, and thus in the real exhange rate,
based on the interation between a tradable and a non-tradable setor. In our
model, we derive the following often used preditions: urrenies are expeted
to undergo a real appreiation, if there is (1) an improvement of the terms
of trade, (2) an inrease in government spending, (3) a redution of urrent
aount surplus (or an inrease in the deit) or (4) an inrease in the relative
produtivity of the tradable to the non-tradable setor.
The relevane of the rst three fators is strongly supported by our empirial
analysis with data based on 22 ountries over a period from 1970 to 2004. No
support ould, however, be found regarding the predited relationship between
relative produtivity of the two setors and the real exhange rate.
The em-
pirial analysis also shows that an inrease in the degree of openness regarding
international trade in goods and servies aets the real exhange rate in the
expeted positive diretion, whereas hanges in the degree of ompetition measured by a regulatory index do not seem to have any explanatory power. With
respet to the Swiss ase, hanges in the terms of trade, openness, the government expenditures and the urrent aount seem to explain the major hanges
in Switzerland's real exhange rate pretty well.
This result, ombined with the stylized fats shown in this paper, is helpful in
assessing the disussion about the Swiss prie island. It is often assumed that
high pries in Switzerland are mainly due to a lak of ompetition partiularly
in the non-tradable setor or ineient regulations.
In addition, high pries
in Switzerland are believed to be a reent phenomenaone that arose ten to
fteen years ago.
Our analysis questions these beliefs. First, the relative inrease of pries in
Switzerland seems to be a phenomenon that goes bak to the 1970s and is, in
partiular, onneted to the introdution of exible exhange rates in the beginning of this deade. Seond, the long-term improvement of the terms of trade,
whih should not be deplored as suh, seems to be an important fore behind
the real appreiation.
Terms of trade movements, however, are at least par-
tially subjet to world demand and supply movements and behind the reah of
a ountry's poliy. Third, there is little evidene of a stong impat of regulations
on the real exhange rate. Neither are we able to nd a relationship between
regulations and the real exhange rate, nor is the evolution of Switzerland's
regulatory environment exeptional.
We onsider our paper as a starting point for a more thorough analysis of the
reasons for dierenes and hanges in the prie level of Switzerland and other
ountries. Our empirial analysis explores a redued-form relationship between
the real exhange rate and its determinants.
In order to further assess our
model, future work needs to address the relationship between the determinants
and the intermediate variables, suh a employment and wages, more diretly.
Future work also would inlude theoretial models that allow for international
trade in intermediates or "`middle produts"' (Sanyal and Jones 1982). Finally,
the empirial analyses would have to inlude ner measures of the degree of
5
CONCLUSION
ompetition and regulation as well as the use of disaggregated data.
22
PSfrag replaements
B
0
DATA SOURCES
23
1
2
3
4
5
6
0.5
1.0
1.5
2.0
2.5
3.0
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1950
1960
1970
1975
1980
1985
1990
1995
2000
USA
GER
ITA
FRA
AUT
JPN
CHE
DNK
Figure 9:
Relative Consumer Pries for Seleted Produts
(2005).
Switzerland Relative to
an Unweighted Average in Italy, Germany and Frane (Switzerland (CH) = 100). Calulation
based on a Case Study by SECO (2008), Preisinsel Shweiz, pp. 87.
A Additional Graphs and Tables
B Data Soures
B.1
Country List for Regression Analysis
Australia, Austria, Belgium, Canada, Denmark, Finland, Frane, Germany,
Greee, Ireland, Italy, Japan, Korea, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States.
B.2
OECD Eonomi Outlook
OECD Eonomi Outlook: Annual and quarterly data Vol 2008 release 02.
http://soureoed.org
B.3
OECD National Aounts
OECD Annual National AountsMain aggregates Vol 2008 release 01; OECD
Annual National AountsPopulation and Employment Vol 2008 release 01.
http://soureoed.org
B
DATA SOURCES
24
PSfrag replaements
0
1
2
3
4
5
6
0.5
1.0
1.5
2.0
2.5
3.0
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1950
1960
1970
1975
1980
1985
1990
1995
2000
USA
PSfrag replaements
GER
0
ITA
1
FRA
2
AUT
3
JPN
4
CHE
5
DNK
6
0.5
1.0
1.5
Figure 10:
Relative Consumer Pries for Seleted Produts
(2008).
Switzerland Relative to
an Unweighted Average in Italy, Germany and Frane (Switzerland (CH) = 100). Calulation
2.0
based on a Case Study by SECO (2008), Preisinsel Shweiz, pp. 87.
2.5
3.0
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1950
1960
1970
1975
1980
1985
1990
1995
2000
USA
GER
ITA
FRA
AUT
JPN
CHE
DNK
Figure 11:
Eurostat.
Comparative Aggregate Prie Level Indies (1996 to 2007) (E27=100), Soure:
B
25
DATA SOURCES
PSfrag replaements
0.10
0
1
2
3
1.5
2.0
2.5
3.0
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1950
1960
1970
0.05
ca
0.00
1.0
gov
−0.05
6
0.5
−0.10
5
ch. in eff. rer − time f.e. / contributions of gov and ca
4
actual
USA
GER
ITA
FRA
1975
1980
1985
1990
1995
2000
AUT
JPN
CHE
DNK
Figure 12:
Table 4:
Governement share of GDP and urrent aount as explanatory variables
Comparative Prie Level Indies (for the ESA95 Aggregates), EU15=100
Year
1995
2006
Food and non-aloholi beverages
Aloholi beverages, tobao and narotis
Clothing and footwear
Housing, water, eletriity, gas and other fuels
Household furnishings, equipment and maintenane
Health
Transport
Communiation
Rereation and ulture
Eduation
Restaurants and hotels
Misellaneous goods and servies
Mahinery and equipment
Constrution
146.3
115.4
112.2
187.3
122.2
153.8
119.5
127.7
134.7
181.1
143.6
147.5
114.3
151.6
133.6
88.1
115.2
154.2
112.9
133.3
105.9
116.7
116.5
139.6
116.6
127.7
101.9
136.4
Soure: Eurostat
∆
06-95
-12.7
-27.3
+3.0
-33.1
-9.3
-20.5
-13.6
-11.0
-18.2
-41.5
-27.0
-19.8
-12.4
-15.2
B
B.4
DATA SOURCES
26
Penn World Tables
Version 6.2, Alan Heston, Robert Summers and Bettina Aten, Penn World Table
Version 6.2, Center for International Comparisons of Prodution, Inome and
Pries at the University of Pennsylvania, September 2006.
http://pwt.eon.upenn.edu/php_site/pwt_index.php
27
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