What can the National Bank do for the economy?

April 10, 2002
Zürcher Volkswirtschaftliche Gesellschaft, Zurich

Summary

From the realisation that monetary policy can have a long-term impact only on the development of the price level, and not on the real growth of the economy, follows that price stability must be the primary goal. The National Bank defines price stability as annual inflation of less than 2%, measured by the national consumer price index. If the National Bank succeeds in keeping price stability within this range, it makes it easier for companies and households to anchor their inflation expectations, and it protects the national economy from the costs of inflation.

In its inflation forecast, the National Bank takes the exchange rate into account. Since the exchange rate influences the course of inflation, and the National Bank sets the short-term interest rate in such a manner as to keep forecast inflation within the target range in the medium term, the exchange rate also has a bearing on the monetary policy of the National Bank. Moreover, the National Bank reserves the right to shift the interest rate within the target range in times of exchange rate fluctuations. It made use of this flexibility in the week before Easter when it lowered the repo rate, thus initiating a downward shift of the three-month Libor rate to the lower end of the interest rate target range, which was confirmed at the Bank's assessment of the situation on 21 March 2002 (1.25%-2.25%).

However, the possibilities of the National Bank to influence the exchange rate are limited. It can bring about a sustained change in the nominal exchange rate only if it changes the markets' expectations about its monetary policy stance. These expectations are ultimately determined by the National Bank's goal to keep medium-term inflation below 2%. Should the National Bank want to lower the nominal exchange rate sustainedly, it would thus have to abandon this goal and introduce an expansionary monetary policy, which would boost inflation expectations.

Download file now

The file can be downloaded with the button below.

Additional files

Related content

Author(s)

  • Jean-Pierre Roth
    Chairman of the Governing Board

Your settings

Required: These cookies (e.g. for storing your IP address) cannot be rejected as they are necessary to ensure the operation of the website. These data are not evaluated further.
Analytics: If you consent to this category, data such as IP address, location, device information, browser version and site visitor behaviour will be collected. These data are evaluated for the SNB's internal purposes and are kept for two years.
Third-party: If you consent to this category, third-party services (used, for example, to add social multimedia content to the SNB's website) will be activated which collect personal data, process these data, disclose them abroad - worldwide - and place cookies. The relevant data protection regulations are linked in the 'Privacy statement for the website of the Swiss National Bank'.

Choose your preferred settings:

This website uses cookies, analytics tools and other technologies to provide requested features, content and services, to personalise the content shown, to provide links to social media, and to analyse the use of the website in anonymised form for the purposes of improving usability. Personal data are also disclosed abroad - worldwide - to video service providers and the analytics tools of these providers are used. More information is available under 'Manage settings'.