KOF Swiss Economic Institute

BulletinNo. 105, March 2017

ECONOMY AND RESEARCH•Eurozone on the Fast Lane →•Businesses – the Winners from the Free Movement of Persons →•Overview of Price Elasticity on the Market for Swiss Wines →•The Employer’s Dilemma: Is it Worth Engaging Employers in VET Reforms? →•On the Initialisation of Adaptive Learning in Macroeconomic Models →

KOF INDICATORS•KOF Business Situation: Business Situation More Positive →•KOF Economic Barometer Rises Markedly →

AGENDA →

FORECAST TABLES →

Editorial

Dearreaders,

Forthefirsttimesince2008,theeconomicdevelopmentinthe eurozone was stronger than in the USA. Readmoreabout thereasons in the firstarticle.Furthersubjectsofthisedition:WhatweretheconsequencesforSwisscom-paniesoftheabolitionoflabourmarketrestrictionsaftertheFreeMovementofPeoplewasintroduced?Asthearti-cles shows, innovations and employment have develop-mentdifferentlydependingof thedistance to theborder.Another researchproject also focuses on companies butmore on the employer itself. The question raised in thisarticle is, if it isworthy for them toengage in vocationaleducationandtraining.Doestheeffortpayoff?Thefourtharticle copeswith a young research strand ofKOF – thewinemarket.Howdoconsumersbehaveifpricesforwhite,roséorredwinerises?Thefiftharticlealsocopeswiththeformingofexpectations.Howcan theybe integrated intomacroeconomicmodelsandhowdoweadeptthem?

Wewishyouagoodread,

DavidIselin,AnneStückerandSolennLeGoff

KOF Bulletin – No. 105, March 2017

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Amongthebiggercountries,economicexpansionacceler-atedparticularlyinGermany(1.8%),Spain(3.2%)andtheNetherlands (2.1%). However, even smaller countries inCentralandEasternEurope,especiallyRomania,BulgariaandSlovakia, recordedsignificantgrowth. In thewakeofSpain’sperformance,thePortugueseeconomyalsopickedupspeedinthesecondhalfoftheyear.Similarly,macro­economicproductionexpandedintheBalticstates.Incon-trast, Italy (1%) andFrance (1.1%), twoeconomicheavy-weights,failedtogathermomentum.TheGreekeconomystagnateddueto low investorconfidenceanduncertaintyregarding the further development of the internationalbailoutprogrammes.

Thebroadly­basedupswingisalsohavingapositiveeffectonthelabourmarket:Sinceitspeakin2013,theeurozoneunemployment rate has been on the decline and hasrecentlylevelledoutat9.6percent.However,thesituationis not the same in all member states. While the Czech

Republic (3.5%)andGermany (3.9%)recordedthe lowestunemployment, rates in Spain (18.4%) andGreece (23%)are still substantially higher than the European average.ThelabourmarketsituationalsoimprovedinFrance(9.6%)andItaly(12%),albeitataslowpace.

Due topersistent,substantialovercapacities in theeuro-zone,economicpressureon inflationhasbeen low.Coreinflation,whichexcludesthevolatileenergyandfoodcom-ponents and is thus a suitable indicator of economicallydrivenupwardtrends,isrisingveryslowlyandstoodat0.9percentinJanuary.

The substantial rise in energy prices inDecemberdid infactleadtoanabruptincreaseineurozoneheadlineinfla-tion.Expressedas theYOYmovementof theharmonisedconsumerprice index, this increaseamounted to1.8percentinJanuary.Atpresent, inflationisthusmoreorlessconsistentwiththeEuropeanCentralBank’stargetofjust

ECONOMYANDRESEARCH

Eurozone on the Fast Lane

In the past year, macroeconomic production in the eurozone expanded by 1.7 per cent, giving Europe a growth edge over the USA for the first time since 2008.

KOF Bulletin – No. 105, March 2017

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under two per cent.Once the energy price effects peterout,inflationislikelytodeclinesharply.TheECBisthere-foremaintaining its current low­interest policy. Althoughthevolumeofitsmonthlybondpurchaseswillbereducedto60billioneurosasofApril,thebuyingprogrammehasbeenextendedatleastuntilDecember2017.

Favourable outlook for 2017 tainted by political uncertaintyAlthoughsomeeconomicindicatorsarehintingataslightdownturn,theupswingintheeurozoneisgenerallyexpect-edtocontinue.Dynamicsfaceacertaindownwardriskinthe formof theDutch,FrenchandGermangeneralelec-tions (in March, May/June and September, respectively),with fears persisting that anti­EU and anti­immigrationpartiescouldmake inroads into theelectoralbases.Thiswould hold back government formation andmight affect

theEU’sdecision­makingability,forinstanceinregardofitsapproachtotheGreekdebtproblem.

Given the quarrels among its governing party, new elec-tionsarealsointheairinItaly.InKOF’sopinion,Italyisthemost likely candidate for political upheaval with a pan­European impact. In the case of an election victory, theMoVimento5Stelleprotestpartyintendstoofferareferen-dumontheabolitionoftheEuroinItaly.Twoothermajoropposition parties are also critical of the joint currency.JusttheprospectofaEuroreferendumaftertheelectionswouldbeenoughtogivethefinancialmarketsthejitters.

ContactFlorianEckert|eckert@kof.ethz.chHeinerMikosch|mikosch@kof.ethz.chStefanNeuwirth|neuwirth@kof.ethz.ch

Adecisivequestioninthediscussionconcerningtheimple-mentationoftheinitiativeagainstmassimmigration(MII)hasbeentheinfluencethatthereintroductionofimmigra-tionrestrictionswouldhaveonbusinessesinSwitzerland.According to indications provided by Swiss businesses,these implications could be significant. Would the newbarrierstoimmigrationthushaveaneffectonthegrowthofSwissfirms?Wouldthesebarriersresultinfirmstrans-ferringproductionabroadorafallinthenumberofbusi-nessesestablishingthemselvesinSwitzerland?

Answers to these questionsmay be found in a newKOFstudy.TheauthorsJanRuffnerandMichaelSiegenthalerexaminedhowtheabolitionofbarrierstoimmigrationasaresult of the introduction of free movement of personsimpacted upon businesses. It was possible to infer fromthisnotonlywhether thebusinessesbenefited fromfreemovementofpersonsbutalsosomeindicationsastotheeffectswhichthereintroductionofobstaclesto immigra-tionwouldhaveonbusinesses.

Onebenefit for theanalysiswas that the liberalisationoftheSwisslabourmarkethashadanunintendedside­effect:businessessituatedneartotheborderbenefitedoverthefirst fewyears, inparticular fromtheabolitionofvariouslabour market obstacles. This was because the Swisslabourmarket opened up not only for immigrants fromEuropebutalsoforcross­bordercommuters.

Due to the opening­up of the Swiss labour market tocross­border commuters, their numbers in Switzerlandincreasedsignificantly:todaytherearemorethan150,000morecross­bordercommutersthantherewereatthestartof 2002. This increase occurred naturally, above all inregionsclosetotheborder.Forexample,theproportionofcross­border commuters out of overall employees hasincreasedbyaround fivepercentagepointssince2000 inmunicipalities lessthan10minutesbycarfromabordercrossing(seeG1).Today,morethanoneoutofeveryfouremployeesinthesemunicipalitiesisacross­bordercom-muter. The graph also shows howmuch the increase in

Businesses – the Winners from the Free Movement of Persons

A large number of entrepreneurs in Switzerland say that free movement of persons is a key ele-ment in the success of their business. But has free movement of persons really made businesses larger, more productive and more innovative? A new KOF study shows that it has: businesses have indeed become larger and more innovative. In fact, due to free movement of persons, they are increasingly deciding to produce in Switzerland.

KOF Bulletin – No. 105, March 2017

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cross­bordercommuterswasconcentratedinareasclosetotheborder.Businessessituatedneartothebordermaythus wish to take advantage of the easier access tocross­bordercommuters.

Not only higher employment but also more innovation Whateffectshave the liberalisationof the labourmarkethad on the size, productivity and innovativeness of firmsneartotheborder?Theauthorsapproachedthisquestionbycomparinggrowthforbusinessessituatedneartobor-dercrossingswiththegrowthofbusinessesthatarefur-ther away from the border. Ruffner and Siegenthalerfocusedhereaboveallontheyears2002to2007,asbusi-nesses close to the borderwere already benefiting fromeasieraccesstoEUworkersduringthisperiod,whilstvar-iousbarriersontheemploymentofEUcitizenscontinuedto apply to businesses that were further away from theborder.Intheseanalyses,itisapparentthateasieraccessto foreignworkershashad a clear positive effect on thegrowthofbusinessesneartotheborder,whichwereabletoincreaseturnoverandemploymentovertheperiodatahigherratethanbusinessesfurtherawayfromtheborder.Freemovementofpersonshasthushelpedthebusinessestogrow.

Howcanthestrongergrowthinemploymentandturnoverforbusinessesclosetotheborderbeexplained?Accordingtothestudy,threefactorsplayacentralrole.First,somebusinessesweresufferingfromsignificantlabourshortag-esovertheyearspriortotheintroductionoffreemovementofpersons,which limitedtheirgrowth.Asaresultof theopening­upofthelabourmarket,businessesreportedfew-erproblemsinrecruitingsuitablestaff–whichinturnled

to significantly higher employment growth. The authorsshowthatbusinessesclosetotheborder,whichsufferedfrom a particularly significant shortage of skilled labourduring the 1990s, became much more productive after2002comparedtobusinesseselsewhereinSwitzerland.

Accordingtothestudy,asecondexplanationforthehighergrowthratesforbusinessesclosetotheborderisthatsuchbusinesses became more innovative. It is apparent thatbusinesses close to the border expanded their researchdepartments more than other businesses. A significantproportion of the new researchers employed werecross­border commuters. Improved access to foreignresearchers and the lower shortage of skilled workershavealsoenhancedtheinnovativenessmeasuredforbusi-nesses close to the border: for instance, over the yearssince 2002, their number of patent applications hasincreasedatasignificantlyhigherratethanthoseofbusi-nessesfurtherawayfromtheborder.

Third,anothersignificanteffectresultedfromthefactthatbusinesseshadincreasinglytransferredproductionactivi-ties towards the border in order to benefit from betteraccess to Europeanworkers. In otherwords, freemove-mentofpersonshashadan impactonbusinesses’deci-sionsconcerningtheirlocation.Overtheyearsafter2002,the number of new businesses grew at a higher rate inregions near to the border than in regions further awayfromtheborder.Inaddition,theresultsalsoshowedthatbusinesseswithbranches invariouspartsofSwitzerlandbefore the introduction of free movement of personsincreasedtheiremploymentlevelsafter2002,inparticularinthefacilitiessituatedneartotheborder.

0.0%

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0–10 min 10–20 min 20–30 min 30–40 min 40–50 min >50 min

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G 1: Changes to Cross-Border Commuters of Overall Employment

Commuter distance to the next border crossing

G 1: Changes to Cross-Border Commuters of Overall Employment

KOF Bulletin – No. 105, March 2017

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In order to assess price elasticity for different specifica-tions,thefigureshavebeenaggregatedaccordingtocolour(red, white, rosé) and AOC wine­growing region (Valais,Vaud, German­speaking Switzerland, Geneva, Ticino andthreelakes)atmonthlyintervalsoveraperiodoffiveyears(2012–2016).Thevariables­quantityandaveragepriceperlitre ­ have been transformed into natural logarithms inordertobeabletoestimatepriceelasticitydirectlyforthecoefficientsresultingfromtheeconometricmodeloflinearregression.

Asshowninthetablepresentingtheanalysis(seeT1),theestimateofpriceelasticityforSwissAOCwinesoveraperi-odoffiveyearsis–2.01.Thisfigureisconsistentwiththevarious previous analyses carried out by the KOF using

OSMVdata.Itwouldthusappearthat,forSwissAOCwinesoldthroughlargeretailers,anincreaseorafallof2.01percent of consumption in terms of quantity sold (litres) isassociatedwithafalloranincreaseofonepercentofthepriceperlitre.

The statistical significance is indicated alongside eachcoefficient estimated by the following standard p values:highly significant (<1 per cent), significant (<5 per cent)andnotsignificant(>10percent).Thecoefficients“totalpercolour”and“totalperregion”havebeenestimatedbypanelregressionwithfixedeffectsoverthetypesofwinesandfixedtemporaleffects.

1TheOSMV[www.osmv.ch]wasestablishedbyChangins(AdvancedInstituteforViticultureandOenologyinNyon)onbehalfoftheInter­BranchOrganisationofSwissVinesandWines(IVVS).

Overview of Price Elasticity on the Market for Swiss Wines

Since 2015, KOF analyses, in cooperation with the Swiss Wine Market Observatory (OSMV)1, have made it possible to set up a tool for analysing price elasticities on the Swiss wine market. As new results show, rosé wines have the highest price elasticity in Switzerland. This indicates that con-sumers should lower their purchases of rosé wine faster when the prices increase.

Allinall,theresultsshowthatbusinessesneartothebor-derinSwitzerlandhavebenefitedsubstantiallyfromeasieraccess toworkers fromtheEU.Had theybeenunable torely on cross­border commuters, the businesses wouldhave grown at a slower rate and therewould have beenfewerbusinessesneartotheborder.However,theresultsalsosuggestthatthebusinesseshavebeenajointcauseofthe substantial influx of foreign nationals over the yearssincethelabourmarketwasopenedup.Freemovementofpersonshashadtheeffectofcreatingjobsthatwouldnotevenhaveexistedwithoutfreemovementofpersons.Theresultingincreaseindemandforworkershelpstoexplainwhythelabourmarketoutlookforlocalworkersinlabourmarketsclosetotheborderhasnotdeteriorated,despitehigh immigration.However, the results of the study also

showthatareductioninimmigrationtoSwitzerlandcannotbe achievedwithout dampening down the growth in jobsandthusputtingthebrakesoneconomicdevelopment.

ContactJanRuffner|ruffner@kof.ethz.chMichaelSiegenthaler|siegenthaler@kof.ethz.ch

You can find the KOF Working Paper no. 424 “FromLabour to Cash Flow? The Abolition of ImmigrationRestrictionsand thePerformanceofSwissFirms”byJanRuffnerandMichaelSiegenthalerat:http://dx.doi.org/10.3929/ethz-a-010821915 →

KOF Bulletin – No. 105, March 2017

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BasedontheresultsofacomparisonofSwissAOCwinesaccording to colour, roséwines (–2.39) appear to have agreater price elasticity than white wines (–2.23) and redwines (–1.65). Among the producer regions, wines fromValais(–2.67)andthethreelakes(–2.49)overallhavequiteahighpriceelasticity,whilepriceelasticityisaverageforVaud (–1.53) and Geneva (–1.70), and not significant forGerman­speakingSwitzerlandandTicino.

The reaction of themarket in terms of quantities of redwine sold following a change in price appears to berelativelyweakacrosstheproducerregions,incontrastto

thepositionforroséwineswherepricefluctuationspointtotheseasonalnatureoftheproductandgiverisetoastrong-er reaction on the part of consumers. There does notappeartobeanysignificantcorrelationbetweenquantitiesandpricesforredandroséwinesfromTicinoandforwhitewinesfromGerman­speakingSwitzerland.Thisisprobablyduetothehighlevelofheterogeneityamongthedifferentlabelswithintheseclassesofwines.

Overthenextstages,thestructureofthepanelwithmorethan100differenttypesofwinewillbetakenintoaccount,alongwithothervariablessuchasclimatecontrol(temper-ature),macro­economic (exchange rate) and agricultural(harvest) variables. Inorder toaddressendogeneity con-cernsbetweenquantityandprice,othereconometricmod-els, such as the instrumental variable model, will beappliedtothesedata.Theestimationofpriceelasticitywithcausal interpretation (effect of a percentage change inpriceonthepercentagechangeinquantitiessold)couldbeofmajor benefit for the Swiss wine­producing sector, inparticularwith a view tomaximising the turnover of thewine­growing industry through theadoptionofasuitablepricingpolicy.

ContactAlexandreMondoux|mondoux@kof.ethz.ch

T 1: Price Elasticity of Swiss AOC Wines in Major Retailers Over the Period 2012–2016 Red White Rosé Total (by region)

Valais -1.21*** -1.35*** -3.56*** -2.67***

Vaud -1.09*** -0.86** -1.97*** -1.53***

German-speaking -1.76*** 0.28 -6.01*** -3.82 Switzerland

Geneva -1.14*** -1.51*** -2.56*** -1.70**

Ticino -0.54 -4.16*** 0.53 -0.72

3 lakes -2.11*** -1.84*** -2.40*** -2.49***

Total (by colour) -1.65*** -2.23*** -2.39*** -2.01***

*** p < 0.01, ** p < 0.05, * p < 0.1

T 1: Price Elasticity of Swiss AOC Wines in Major Retailers Over the Period 2012–2016

Lavaux,Vaud,istwellknownforistwhitewines.

KOF Bulletin – No. 105, March 2017

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Mostreformsstartfromsystemswhereskillsareproducedintheeducationsystemandconsumedbyemployers,andthe VET reforms aimed at improving labourmarket out-comestakeoneoftwoforms(seeG2):InModel1,employ-ers contribute to curriculum development. In Model 2,employersparticipateinallVETprocesses:designingcur-ricula, training apprentices, and initiating curriculumupdates.InModel2employersgofrombeingconsumersofskillstobeingbothproducersandconsumers.

Inanewstudythatanalysesemployerengagement,Kath-erineCavesandUrsulaRenoldarguethatModel1createsa prisoner’s dilemma that prevents engagement, eventhough it seems to be the option that requires the leastcommitment.IffirmsinvesttheirtimeandexpertiseinVETcurriculaandtheircompetitorschoosenotto,thecompet-itors may benefit from better skilled graduates withouthavinghadtoinvest.Asaresult,theinvestingfirmseitherdropoutoftheprogramorreducetheirinvestments.Pro-gramqualitysuffersandthereformfails(seeG3).

Model2doesnotcreatethedilemma.Apprenticesarepro-ductiveandsomestayonafter training.Thismeans thatthetrainingcostsarerecoveredorevenexceeded.FirmsinModel2alwaysbenefitfromparticipationregardlessoftheactionstheircompetingfirmstake(seeG4).

CavesandRenoldusecasestudiesofeightongoingreformsthat started in July 2015 to examine engagement andimplementationprogress.CasesA,B,C,andDaremajorAmerican cities or states. IA and IB are internationalreforms,andNAandNBarenon­standardreformscarriedoutwithnon­governmentleadership.Allcaseswerepartofthe2015CEMETS1summerinstitute,duringwhichthepar-ticipantsstudiedVET,revisedtheirreformplans,andpar-ticipatedindatacollection.CavesandRenoldscoredthesecaseswithaqualitative rubric (seeKOFWorkingPaper2)regarding their employer engagement. After followingeachreformcasefortwoyears,theyratedtheprogressofeachaseitherstalled(1),progressingincrementally(2),orprogressingradically(3).

The Employer’s Dilemma: Is it Worth Engaging Employers in VET Reforms?

As skills mismatch and youth unemployment are high, vocational education and training (VET) sys-tems in many countries are undergoing reforms in order to meet skills demand. Employer engage-ment is a known component of strong VET programs, but what should employer engagement look like during the reform process?

Design

Application

Outcomes

Updating

Skills

Employment System

Design

Application

Outcomes

Updating

Skills

Employment System

Design

Application

Outcomes

Updating

Skills

Employment System

Starting pointEducation provides skills to employment through labour market.

Model 1:Employers help design a new curriculum to improve the skills education provides.

Model 2:Employers participate throughout reform, helping provide and demand skills.

G 2: Two Models of VET ReformG 2: Two Models of VET Reform

1http://www.cemets.ethz.ch2http://e­citations.ethbib.ethz.ch/view/pub:185752?lang=en

KOF Bulletin – No. 105, March 2017

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More engagement, more implementation progressA comparison of the eight reforms’ progress shows thatmore employer­engaged reforms make more progress(seeG5).Cexcludesemployersandisstalled.NB,NA,andIAsomewhatengageemployersandprogressslightly.B,D,andAallinvolvehighemployerengagementandarepro-gressing radically. IB is an exceptional case with lowengagementandradicalprogressnevertheless.Itisworthmentioningthatthisprojectwasimplementedbyastrongtop­downgovernment.

Theauthorsareable toshow thatprojectswhich involveemployers in the reform process make more progresstowardimplementingVET.However,employerengagementisnotalwaysanecessarycondition:top­downreformscanmake progress regardless of engagement, though theyraiseconcernsabouteventualqualityandoutcomes.

Thisstudyisqualitative;theory­buildinginsteadofcausal.Itislimitedbecauseemployerengagementisnottheonlyinfluencing factor. It does not investigate the quality ofreformsintermsofoutcomesasallofthereformsarestillpilot projects. The underlying sample is deep but verysmall, and the variables are measured qualitatively bynecessity.Theauthorswillcontinuetofollowallcasesandwilladdnewonesannually.

Employerscanchangefrombeingconsumersofskillstoco­producers and consumers of skills. While askingemployers to take on more responsibility seems like acounterintuitive strategy for reform feasibility, it actuallyresolves the prisoner’s dilemma of lower­engagementreforms. As soon as employers are able to recover theirinvestments through the productive contributions andfutureemploymentoftrainees,theycanaffordtopartici-pateirrespectiveoftheactionsofotheremployers.Involv-ingemployersintheimplementationofaneworbetterVETsystemmightseemdangeroustoeducation­basedreform-ers,butitappearstobethesafestbetfortheprogressoftheirreforms.

ContactKatherineCaves|caves@kof.ethz.chUrsulaRenold|ursula.renold@kof.ethz.ch

You can find the KOF Working Paper No. 423 “TheEmployer’sDilemma.Employerengagementandpro-gressinvocationaleducationandtrainingreforms”byKatherineCavesandUrsulaRenoldat:www.e-collection.library.ethz.ch/eserv/eth:50179/eth-50179-01.pdf →

Explanation: costs to the firm are -, benefits are +, and maintaining the status quo is 0

Firm A

Participate Refrain

Firm BParticipate +, + -, +

Refrain +, - 0,0

G 3: Prisoner’s Dilemma in Model 1

Explanation: costs to the firm are -, benefits are +, and maintaining the status quo is 0

Firm A

Participate Refrain

Firm BParticipate +, + +, -

Refrain -, + -, -

G 4: Game for Model 2

G 3: Prisoner’s Dilemma in Model 1

G 4: Game for Model 2

Explanation: costs to the firm are -, benefits are +, and maintaining the status quo is 0

Firm A

Participate Refrain

Firm BParticipate +, + -, +

Refrain +, - 0,0

G 3: Prisoner’s Dilemma in Model 1

Explanation: costs to the firm are -, benefits are +, and maintaining the status quo is 0

Firm A

Participate Refrain

Firm BParticipate +, + +, -

Refrain -, + -, -

G 4: Game for Model 2

A

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NANB

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core

Employer Engagement Score

G 5: Employer Engagement and ProgressG 5: Employer Engagement and Progress

KOF Bulletin – No. 105, March 2017

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How we form our expectations is an important questionregarding all kind of economicmodelling. It has becomeclear that the rational expectations hypothesis does notcapturealldimensionsofhowexpectationsaredeterminedinreality.Adaptivelearningalgorithmshavebeenproposedtoprovideaproceduralrationalityviewonagents’processof expectations formation. Reopening a long standingdebateonhowexpectationsshouldbemodelledinmacro-economicmodels,theheuristicsprovidedbylearningalgo-rithms come at the cost of introducing new degrees offreedomtotheanalysis.

Oneopenquestionrelatestohowtheserecursivemecha-nismsshouldbeinitialisedinordertoberepresentativeofagents’ learning­to­forecast behaviour. Importantly, leav-ingthedefinitionofinitialbeliefsuncheckedrisksopeningthewayforseverebiasestoeconomicinference,causedforinstancebydataoverfittingandweakidentificationofmod-elparameters.Thisisparticularlyrelevantwhentheeffectofinteresttakesplacenearthebeginningofthesampleofdata,asinthecaseinhistoricalassessmentsoftheeffec-tivenessofalternativepolicydesigns.

Themaincharacteristicoftheadaptivelearningapproachisitsrelianceonrecursivealgorithmsinordertorepresenthowagentsupdatetheirbeliefs,asnewobservationsaboutthe economic relationship of interest become available.Suchrecursionsnaturallydemandaninitialstartingpoint,anditisthenumericalspecificationoftheseconditionsthatcan be denoted as the initialisation problem.Clearly, theuncertaintiesaffectingtheinitialisationofthelearningpro-cesswillpropagaterecursivelyintothepredictionsobtainedwiththemodel.Itseemscrucialthattheresearcherunder-standsthemagnitudeofthesedistortionsandhowtheycanaffectstructuralinferences.

Intheirnewpaper“OntheInitializationofAdaptiveLearninginMacroeconomicModels”,MicheleBerardiandJaquesonK.Galimbertiinvestigatethisissuewithparticularattentiontotheappliedliteratureoflearninginmacroeconomics.

They review and evaluatemethods previously adopted intheappliedliteratureofadaptivelearninginordertoinitial-ise agents’ beliefs. Previous methods are classified intothreebroadclasses:equilibrium­related,trainingsample­based,andestimation­based.

Theyconductseveralsimulationscomparingtheaccuracyoftheinitialestimatesprovidedbythesemethodsandhowtheyaffecttheaccuracyofotherestimatedmodelparame-ters.Theyfindevidenceagainsttheirjointestimationwithstandardmomentconditions:astheaccuracyofestimatedinitials tends to deteriorate with sample size, spillovereffectsalsonegativelyaffecttheaccuracyoftheestimatesofthemodel’sstructuralparameters.

Inotherwords,thelargerthesampleofdatausedtoesti-mate themodeland thecorresponding initialbeliefs, thelarger therisksof incurring inmisleadinghistoricalcon-clusions. Solutions to this problem are discussed in thepaper.

ContactJaquesonK.Galimberti|galimberti@kof.ethz.ch

On the Initialisation of Adaptive Learning in Macroeconomic Models

A new KOF Working Paper analyses how adaptive learning can be implemented into macroeco-nomic modelling.

Youcan find theKOFWorkingPaperNo.422“OntheInitialization of Adaptive Learning in MacroeconomicModels”byMicheleBerardiandJaquesonK.Galimbertiat:www.e-collection.library.ethz.ch/view/eth:50090 →

KOF Bulletin – No. 105, March 2017

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KOFINDICATORS

KOF Business Situation: Business Situation More Positive

The KOF Business Situation Indicator for the Swiss private sector improved in February 2017 for the first time in three months (see G 6). Although, considered from a long-term perspective, the current business situation can be classified as rather less favourable, businesses were able to catch their breath a little bit in February in structural terms.

The improvement in thebusinesssituationwasdriven inFebruary by the economic sectors of banking and insur-ancealongsidethemanufacturingsector.Thesituationintheconstruction­relatedsectorsofconstructionandpro-ject engineering is goodand virtually unchanged.On theotherhand,adeclinewasreportedbyretailers,whowerealready complaining of a rather negative business situa-tion.Wholesalers,thehotelandcateringsectorandotherserviceprovidersweremostrecentlyquestionedinJanu-ary.Atthattime,thesituationhadbrightenedupforotherserviceproviders,whilstithadbarelychangedinthehotelandcateringsector.By contrast,wholesalersweremorelikelytoreportanunfavourablebusinesssituation.

KOF Business Situation

G 6: KOF Business Situation Indicator

(balance, seasonally adjusted)

2013 2014 2015 2016 20170

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G 6: KOF Business Situation Indicator (balance, seasonally adjusted)

T 2: KOF Business Situation for Switzerland (seasonally adjusted balances)T 2: KOF Business Situation for Switzerland (seasonally adjusted balances)

Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17

Private sector (overall) 3.8 6.2 7.7 9.9 8.2 10.0 11.0 11.4 11.6 10.0 9.4 9.4 10.6

Manufacturing -13.6 -9.9 -7.2 -6.1 -3.4 -8.6 -7.8 -7.6 -6.0 -9.6 -8.8 -9.8 -8.0

Construction 27.5 26.0 25.0 22.4 23.0 24.0 27.7 23.1 24.8 26.5 24.5 27.9 28.0

Project engineering 46.0 45.5 45.3 46.7 44.0 45.5 46.2 46.1 45.9 42.1 46.3 47.3 47.2

Retail trade -9.1 -5.9 -8.1 -9.4 -8.3 -11.8 -10.3 -8.4 -8.0 -12.1 -9.8 -6.9 -11.7

Wholesale trade - - -7.8 - - 4.2 - - 3.5 - - -6.9 -

Financial services 15.7 21.2 18.1 26.5 14.5 18.3 23.0 23.3 24.6 21.7 17.9 20.8 30.8

Hotel and catering - - -16.7 - - -23.0 - - -16.9 - - -16.3 -

Other services - - 20.5 - - 24.0 - - 22.2 - - 25.3 -

Answers to the question: We assess our business situation as good/satisfactory/bad. The balance is the percentage of “good” answers minus the percentage of “bad” answers.

KOF Bulletin – No. 105, March 2017

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Consideredfromaregionalperspective,thebusinesssitu-ationimprovedinmostmajorregionsusedbytheFederalStatistics Office (FSO). An improvement was apparent inNorthWestSwitzerland,EspaceMittelland,EasternSwit-zerland,theZurichregionandtheLakeGenevaregion.Thesituationworsenedintworegions:inCentralSwitzerlandthesituationisnolongeraspositiveasitwaslastmonth.Ticino, which was previously already reporting the mostunfavourablebusinesssituation,lostyetfurtherground.

Explanation of graphsGraphG6showstheKOFbusinesssituationforallsectorsof theeconomycoveredby thesurvey.Forsectorsof theeconomy that are only surveyed quarterly, the businesssituationismaintainedatthesamelevelduringtheinter-veningmonths.

Graph G7 reports the business situation in the majorregionsusedbytheFederalStatisticsOffice.Theregionsarecoloureddifferentlydependingonthebusinesssitua-tion.Thearrowswithintheregionsindicatethechangeinthebusinesssituationcomparedtothepreviousmonth.Anarrow pointing upwards means that the situation hasimprovedonthepreviousmonth.

TheKOFbusinesssituationisbasedonover4,500reportsby Swiss companies. Every month, businesses are sur-veyed inthefollowingsectors: industry,retail trade,con-structionandprojectengineeringaswellasfinancialandinsurance services.Businesses in thehotel and cateringsector, wholesalers and the other service providers aresurveyedinthefirstmonthofeveryquarter.Amongotherquestions, thebusinessesareasked toassess theircur-rent business situation. Theymay rate their situation as“good”,“satisfactory”or“bad”.Thebalanceofthecurrent

business situation is the percentage difference betweenthe“good’and“bad”responses.

ContactKlausAbberger|abberger@kof.ethz.ch

The angle of the arrows reflects the change in the business situation compared to the previous month Source: KOF

Net balances55 to 100 30 to under 55 16.5 to under 309 to under 16.5 5 to under 9 -5 to under 5-9 to under -5 -16.5 to under -9 -30 to under -16.5-55 to under -30 -100 to under -55

G 7: KOF Business Situation in the Private Sector

Lake Geneva

Espace Mittelland

North-West Switzerland

Zurich

Eastern Switzerland

Central Switzerland

Ticino

G 7: KOF Business Situation in the Private Sector

YoucanfindmoreinformationabouttheKOFBusinessTendencySurveysonourwebsite:www.kof.ethz.ch/en/surveys/business-tendency-surveys →

KOF Bulletin – No. 105, March 2017

11

KOF Economic Barometer Rises Markedly

In February 2017, the KOF Economic Barometer rose by 5.2 points to a new reading of 107.2 (see G 8). This pronounced upturn to a level clearly above its long-term average indicates that in the near future the Swiss economy should grow at rates above average.

TheKOFEconomicBarometerclimbedby5.2pointsfrom102.0inJanuary(revisedupfrom101.7)to107.2,whichismarkedly above its long­termaverageandashighas ithadlaststoodattheendat2013.TheSwissfrancappreci-ationshockfromearly2015appearstohavebeenlargelyovercome.

The strongest positive contributions to this result comefromthemanufacturingindustry,followedfarbehindbythe hospitality industry. Slightly positive signals comefrom the financial sector, the exporting industry and theconstruction sector, whilst the indicators relating todomestic private consumptionhavepractically remainedunchangedcomparedtoJanuary.

Withinthemanufacturingindustry,theimprovedtotalout-lookwas primarily driven by the paper, textile, electricalandmachine­building industries, and architects are alsomore optimistic than previously. The remaining industrybranches,ontheotherhand,recordedhardlyanychange.Themarkedly improvedsentiment inmanufacturingasawholeisprimarilyareflectionofthemorepositiveassess-mentof incomingorders, followedby theproductionandemploymentoutlookaswellasbytheprofitsituation.

KOF Economic Barometer and reference time series: annual updateIn September 2016, the scheduled annual update of theKOFEconomicBarometertookplace.TheannualupdateoftheBarometer includes the followingstages: redefinitionofthepoolofindicatorsthatentertheselectionprocedure,updateofthereferencetimeseries,anewexecutionofthevariableselectionprocedureandaproceduretoestimatemissingmonthlyvaluesofquarterlyvariables.Theupdatedreferenceseriesisthesmoothedcontinuousgrowthrateof Swiss GDP according to the new System of National

AccountsESVG2010,releasedattheendofAugust2015,whichtakesintoaccountthereleaseofthepreviousyear’sannualGrossDomesticProduct (GDP) data by theSwissFederalStatisticalOffice.Asaresultoftheindicatorvaria-bleselectionprocedure,theupdatedKOFEconomicBaro­meterisnowbasedon272indicators(insteadof238asinthepreviousvintage)fromapoolofmorethan400potentialindicator series. They are combined using statisticallydeterminedweights.

ContactMichaelGraff|graff@kof.ethz.ch

2006 2008 2010 2012 2014 201660

70

80

90

100

110

120

-6

-4

-2

0

2

4

6

KOF Economic Barometer and Reference Series

KOF Economic Barometer(Index values; long-term average 2006–2015=100; left scale)Month-on-month change of the Swiss business cycle(Reference series; SECO/KOF, right scale)

G 8: Economic Barometer and Reference Series

FordetailedinformationontheKOFEconomicBarometer,visitourwebsite:www.kof.ethz.ch/en/forecasts-and-indicators/indicators/kof-economic-barometer →

KOFBulletin–No.105,March2017

12

AGENDA

KOF EventsKOF WirtschaftsforummitVorträgenvonProf.Dr.Jan­EgbertSturm,ETHZürich,DirektorKOFKonjunkturforschungsstelle:«DieFrühjahrsprognosederKOF»MartinNaville,ChiefExecutiveOfficer,Swiss­AmericanChamberofCommerce:«EinschätzungderAuswirkungenderneuenUS­WirtschaftspolitikaufdieSchweizerKonjunktur»ETHZürich,Mittwoch,29.März201711.30bis13.00Uhrwww.kof.ethz.ch/news-und-veranstaltungen/event-calendar-page/kof-wirtschaftsforum →

EEAG Report 2017: Populism and Economic PolicyHaroldJames(PrincetonandEEAG)andJan­EgbertSturm(KOFSwissEconomicInstituteandEEAG)willdiscussthechallengesthatlieaheadofusconcerningtherisingpop-ulism and its consequences for economic policy. MartinMeyer(SchweizerischesInstitutfürAuslandforschung)willmoderatetheevent.

SwissReCentreforGlobalDialogue,Rüschlikon,Zurich16March201717h30–19h30www.cgd.swissre.com/events/EEAG_REPORT_2017.html#tab_3 →

KOF Research Seminar:www.kof.ethz.ch/en/news-and-events/event-calendar-page/kof-research-seminar →

KOF-ETH-UZH International Economic Policy Seminar:www.kof.ethz.ch/en/news-and-events/event-calendar-page/kof-eth-uzh-seminar →

Conferences/WorkshopsYou can find current events and workshops under the following link:www.kof.ethz.ch/en/news-and-events/event-calendar-page/konferenzen →

KOF Media AgendaHereyoucanfindourmediaevents:www.kof.ethz.ch/en/news-and-events/media/media-agenda →

KOF PublicationsYouwillfindacompletelistofallKOFpublications(KOFAnalyses,KOFWorkingPapersandKOFStudies)onourwebsite.www.kof.ethz.ch/en/publications →

KOFBulletin–No.105,March2017

13

TABLEKOFWINTERFORECAST2016ESTIMATES AND FORECASTS ACCORDING TO KOF'S FORECASTS DECEMBER 15, 2016)

SWITZERLAND

Real Gross Domestic Product by Type of Expenditure

2007- 2016 2017 20182015 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Private consumption 1.6 0.7 0.5 0.5 1.1 1.2 1.0 0.9 0.9 1.1 1.2 1.2 1.2 0.9 0.9 1.1Public consumption 1.3 1.9 1.3 1.0 0.9 0.8 0.7 0.5 0.2 0.1 0.3 0.3 0.3 1.4 0.8 0.3Gross fixed capital formation 1.6 3.2 2.5 0.4 -0.5 -0.2 0.2 -0.5 1.3 2.7 1.7 2.4 2.7 2.3 0.0 1.7– Construction 2.0 -0.3 0.1 1.3 1.3 0.5 0.7 1.4 2.0 2.4 2.0 1.6 1.6 0.4 0.9 1.9– Machinery and equipment 1.4 4.9 3.6 -0.1 -1.5 -0.5 -0.1 -1.8 0.8 2.8 1.6 2.9 3.5 3.6 -0.5 1.6Exports of goods (1) and services 2.9 7.8 4.3 1.7 2.7 1.9 1.6 3.3 2.8 2.3 3.5 4.4 3.4 5.6 2.2 3.0– Goods 2.2 9.9 4.4 2.5 1.6 0.9 1.1 1.8 3.2 4.1 4.0 4.0 4.3 6.7 1.7 3.4– Services 2.7 3.1 2.2 1.6 1.5 3.9 2.9 1.9 2.9 3.0 3.1 2.6 2.7 3.2 2.7 2.8Imports of goods (1) and services 3.1 4.2 1.2 1.1 2.7 4.1 2.5 1.1 1.9 3.3 3.7 3.9 3.7 3.2 2.5 3.0– Goods (1) 1.8 5.9 1.2 2.1 3.4 5.2 3.1 0.4 1.5 3.4 4.1 3.8 3.5 4.1 3.1 3.0– Services 6.0 0.7 -4.5 -1.7 1.0 2.6 2.8 1.0 2.0 3.5 4.1 3.2 3.7 1.5 1.2 3.0Change in stocks (2) 0.1 -1.8 -1.4 -0.6 0.9 2.8 2.3 0.3 0.1 0.5 0.5 0.2 0.1 -2.1 1.5 0.4Gross Domestic Product (GDP) 1.6 1.9 1.5 1.0 1.3 1.8 1.7 1.7 1.8 1.9 2.1 2.0 1.9 1.4 1.6 1.9

(1) Without valuables (i.e. precious metals including non-monetary gold, precious stones and gems as well as objects of art and antiquities) (2) Percentage contribution to GDP-growth

Other Macroeconomic Indicators

2007- 2016 2017 20182015 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Real effective exchange rate of CHF (1) 2.5 -2.2 -1.7 1.6 1.6 -0.7 -0.7 -2.8 0.0 -2.4 -0.9 -2.8 0.0 -2.8 -0.3 -1.5

Short term interest rate (3-month Libor CHF) (2) 0.6 -0.8 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7

Yield of 10 years federal bonds (2) 1.5 -0.4 -0.4 -0.5 -0.2 -0.1 0.0 0.0 0.1 0.2 0.2 0.2 0.3 -0.4 0.0 0.2

Consumer prices (3) 0.2 -1.0 -0.4 -0.2 -0.1 0.4 0.2 0.3 0.3 0.2 0.2 0.3 0.3 -0.4 0.3 0.3

Full-time equivalent employment (4) 1.3 -0.2 0.2 0.4 0.4 0.5 0.4 0.3 0.3 0.3 0.6 0.8 0.8 0.0 0.4 0.4

Unemployment rate (2.5) 2.9 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.4 3.4 3.4 3.4 3.3 3.3 3.4

(1) Annualised(2) Level(3) Same quarter of previous year(4) Annualised trend-cycle component(5) Unemployed as percentage of labour force according to survey 2012-2014

GLOBAL ECONOMY

2007- 2016 2017 20182015 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Real Gross Domestic Product (GDP)– OECD total 1.2 1.6 1.4 2.3 1.8 1.9 1.9 1.9 2.0 2.1 2.1 2.2 2.2 1.7 1.9 2.1– European Union (EU-28) 0.7 2.0 1.6 2.2 1.6 1.5 1.5 1.6 1.7 1.6 1.6 1.6 1.6 1.9 1.6 1.6– USA 1.3 0.8 1.4 3.2 2.1 2.1 2.0 2.1 2.2 2.4 2.6 2.7 2.8 1.6 2.2 2.4– Japan 0.4 2.8 1.8 1.3 1.1 1.3 1.3 0.9 0.9 0.7 0.7 0.7 0.8 1.0 1.2 0.8Oil price ($ per barrel) (1) 88.5 35.2 47.0 47.0 51.1 55.2 55.4 55.7 56.0 56.3 56.6 56.9 57.3 45.1 55.6 56.8

(1) Level

® KOF, ETH Zürich

Percentage change against

previous quarter (annualised, trend cycle component)2016 2017 2018

previous year

Percentage change against

previous quarter previous year2016 2017 2018

Percentage change against

previous quarter (annualised, seasonal adjusted) previous year2016 2017 2018

Imprint

Publisher KOFSwissEconomicInstitute,ETHZurich

Director Prof.Dr.Jan­EgbertSturm

Editors DavidIselin,SolennLeGoff,AnneStücker

Layout VeraDegonda,NicoleKoch

Pictures Shutterstock,KOF

Address LEEG116,Leonhardstrasse21,8092Zurich

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ISSN1662­4289|Copyright©ETHZurich,KOFSwissEconomicInstitute,2017ThereproductionofthisBulletin(includingexcerptsthereof)ispermittedonlywiththewrittenpermissionofthepublisherandwiththecitationoftheoriginalsource.

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