Macroeconomic Shocks and International Trade: Empirical Findings for Switzerland

We develop a macroeconomic model incorporating international trade. The model is an open economy version of the traditional IS-LM model. Using the recently developed structural vectorautoregression estimation methodology we identify a set of structural shocks. The estimated dynamicresponses of output, net exports, the real interest rate, and the price level to four kinds of disturbances: shocks to aggregate supply, the terms of trade, domestic fiscal policy, and the domestic money market are as expected. In addition, the variance decompositions indicate that domestic aggregate supply shocks account for almost all of the forecast error variance of output even at short horizons. While foreign shocks have some impact on the short-term output variance, domestic demand shocks are not important.