Do Financial Variables Provide Information About the Swiss Business Cycle?

This paper extends the literature on the information content of financial variables with respect to future economic growth. It shows that variables originating from both the equity market and the bond market in Switzerland are useful indicators for forecasting the Swiss business cycle. In particular, the difference between risk-free long-term and short-term rates is an ecient indicator for both the amplitude and the timing, especially over long forecasting horizons. Part of this power seems however to be linked to monetary policy. Contrary to evidence from the US, equity returns are useful only in forecasting the timing of the cycle. It is also shown that financial variables, coupled with indicators from the real economy, form the most ecient combination for forecasting economic growth at all time horizons. Moreover, foreign financial variables also provide useful information. This paper uses for the first time the business cycle dates for Switzerland computed recently by Amstad (2000).