Real-financial connectedness in the Swiss economy

• Published in: Schweizerische Zeitschrift für Volkswirtschaft und Statistik 2020-01, Vol.156 (1), p.1-20, Article 1
• Main Authors: Uluceviz, Erhan, Yılmaz, Kamil
• Format: Article
• Language: English
• Subjects: Bond markets; Connectedness; Connectedness index; Economic models; Economics; Economics and Finance; Exchange rate policy; Foreign exchange; Foreign exchange rates; KOF barometer; Mixed frequency; Network centrality; Original Article; Policy making; Propagation values; Securities markets; Statistics; Switzerland; Volatility
• ISSN: 2235-6282; 2235-6282
• DOI: 10.1186/s41937-019-0049-z

We study macro-financial linkages and their importance within the Swiss economy from a network perspective. First, we investigate the real-financial connectedness in the Swiss economy, using the KOF economic barometer, obtained from real and financial variables, and, the real activity index (RAI), we distilled from a small set of real variables, as two alternative proxies for the real side. Whereas the KOF-barometer-based analysis shows that both sides transmit sizeable shocks to each other without one dominating the other, the RAI-based analysis shows that in the aggregate, the financial side turns out to be the net shock transmitter to the real sector. In the second part, we focus on the relative importance of financial markets as shock propagators using a network centrality measure. We find that 2008-2009 recession in Switzerland and the Swiss National Bank's (SNB) exchange rate policy changes in 2011 and 2015 have significantly altered the way the shocks are transmitted across the two sides of the economy. During 2009-2011, stock, bond, and foreign exchange (FX) markets, in descending order, played important roles as shock propagators. Following the SNB's 2015 policy decision to discontinue the lower bound for the EUR/CHF exchange rate, FX market has become equally important as the stock market but more important than the bond market as a shock propagator.