Kohli, Ul ich
A icle
Concluding Commen s: The SNB's Mone a y Policy
F amewo k Ten Yea s On
Swiss Jou nal o Economics and S a is ics
P o ided in Coope a ion wi h:
Swiss Socie y o Economics and S a is ics, Zu ich
Sugges ed Ci a ion: Kohli, Ul ich (2010) : Concluding Commen s: The SNB's Mone a y Policy
F amewo k Ten Yea s On, Swiss Jou nal o Economics and S a is ics, ISSN 2235-6282, Sp inge ,
Heidelbe g, Vol. 146, Iss. 1, pp. 425-430,
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© Swiss Socie y o Economics and S a is ics 2010, Vol. 146 (1) 425–430
a Visi ing P o esso , Uni e si y o Gene a; Ul [email protected]. A he ime o he con e -
ence, Ul ich Kohli was Chie Economis and Al e na e Membe o he Go e ning Boa d o
he Swiss Na ional Bank.
The SNB’s Mone a y Policy F amewo k Ten Yea s On:
Concluding Commen s
Ul ich Kohlia
I is ob iously no a simple ask o summa ize, in eal ime so o speak, he ind-
ings o wo days o in ense discussion. I belie e ha we ha e lea n a g ea deal
abou he Swiss Na ional Bank’s mone a y policy s a egy and ela ed issues,
and I would like o ake his oppo uni y o hank all he pa icipan s o hei
con ibu ions. O cou se, I am especially g a e ul o S e an Ge lach and Pe e
Kugle who i s came up wi h he idea o his con e ence, o Ma cel Sa ioz who
coo dina ed i om he inside, and, las bu no leas , o Ma ina Oswald who
was esponsible o mos o he o ganiza ion.
Le me y o b ie ly ecap some o he main conclusions ega ding ou mon-
e a y policy s a egy and ouch on some s ill open issues.
All in all, I hink ha we can conclude ha he new mone a y policy s a egy
has been e y success ul. I has se ed us – and Swi ze land – well o e he pas
en yea s. I has p o en lexible enough o deal wi h se e al majo c ises wi h-
ou ha ing o comp omise o depa om i . The pe o mance in e ms o p ice
s abili y o e he pas en yea s has been ema kable, and he ola ili y o in la-
ion and o eal g ow h has been lowe han o e p e ious decades. This is ce -
ainly he message con eyed by he pape s o Jo dan, Pey igne and Rossi, and
o Genbe g and Ge lach. I migh e en be ha he new mone a y policy con-
cep has con ibu ed o lowe ing he na u al a e o unemploymen , as a gued by
Kugle and Sheldon. The SNB has also con incingly demons a ed i s abili y o
con ol he Libo , which is an essen ial pa o i s s a egy (Nau z, O e manns
and Abbassi; Mose ).
Is i in la ion a ge ing? Many di e en opinions we e exp essed on his ques-
ion. Some (Kugle and Sheldon; Posen) say i is, o he s (Jo dan e al.) main ain
i is no , and some a e unce ain (Genbe g: “i walks like a duckling, i quacks
like a duckling, bu i may be a swan”). Al hough in la ion a ge ing can mean
di e en hings o di e en people, he SNB – jus like he Eu opean Cen al
426 Ul ich Kohli
1 See Kohli (2008b).
Bank (ECB) – does no iew i sel as an in la ion a ge e . O cou se, i in la ion
a ge ing means ha one belie es ha he main goal o mone a y policy is o
achie e and main ain a low a e o in la ion, hen we a e all in la ion a ge e s.
Indeed, in his sense, he SNB has almos always been an in la ion a ge e , o
mos o i s 102 yea his o y. The e a e some impo an di e ences be ween he
SNB’s s a egy and he amewo k o sel -decla ed in la ion a ge e s such as he
Rese e Bank o New Zealand, he Bank o England, o he Bank o Canada,
hough. Jo dan e al. as well as Genbe g and Ge lach ha e lis ed some o hese,
including he ac ha he SNB does no a ge a nume ical alue o in la ion,
and ha he SNB has ne e made any commi men as o he ime i would ake
o e u n o p ice s abili y should some de ia ion occu . As poin ed ou by hese
au ho s, and also by Good iend, such lexibili y is only possible i he cen al
bank is highly c edible. I also would like o add ha he e m “in la ion a ge -
ing” is a he un o una e, o i can con ey he w ong imp ession o he public
ha he aim o mone a y policy is o p oduce in la ion, a he han p ice s a-
bili y! The name o he game should be achie ing and main aining p ice s abil-
i y.1 Fo he same eason, I ind he i le “in la ion epo ” a he awkwa d and
de ea is . I much p e e he name ha we ga e o ou own documen , namely
“mone a y policy epo ”. Mo e impo an ly, in la ion a ge ing usually means
ha he cen al bank is gi en a a ge by he go e nmen o he pa liamen –
which is no he case in Swi ze land since he SNB’s legal manda e o p ice s a-
bili y is se once and o all –, bu i also sugges s ha he a ge can be modi-
ied om ime o ime o sui he ci cums ances. While i migh make pe ec
sense o map he cou se owa ds p ice s abili y when in la ion is ini ially high,
a mo ing a ge becomes coun e -p oduc i e once ha he coun y has g adu-
a ed om he p ice s abili y class, o he amewo k hen con ains an elemen o
disc e ion – admi edly exe cised by an ex e nal body a he han by he cen al
bank, bu disc e ion none heless – which migh aise ime inconsis ency issues.
These di icul ies a e absen om ou concep as i now s ands.
Ano he opic ha has been add essed by a numbe o au ho s, and ha keeps
c eeping back conce ns he de ini ion o p ice s abili y and he op imal a e o
in la ion. Le me s ess ha hese a e wo sepa a e issues. The e is a la ge li e a-
u e on he op imal a e o in la ion, s a ing wi h F iedman’s con ibu ion, and
he ecommenda ions a e qui e di e se, anging om a modes nega i e a e o
low posi i e ones. The ques ion o he de ini ion o p ice s abili y is qui e a di e -
en one. Since he SNB is equi ed by law o main ain p ice s abili y, he ques ion
The SNB’s Mone a y Policy F amewo k Ten Yea s On: Concluding Commen s 427
o he op imal a e o in la ion is no on he able. Wha is, on he o he hand, is
how p ice s abili y is de ined. The de ini ion ha he SNB has adop ed is iden-
ical o he one o he ECB, namely an annual a e o in la ion o less han 2%
o e he medium e m. Gi en measu emen e o s, un eco ded quali y changes,
and he well-known subs i u ion bias o he Laspey es unc ional o m, one can
a gue ha an in la ion a e o less han 2% is compa ible wi h p ice s abili y.
None heless, one should no unde es ima e he des uc i e powe o e en low
in la ion a es. As poin ed ou by Jo dan e al., a 2% yea ly in la ion a e means
ha he p ice le el doubles in 35 yea s; i is mul iplied by 7 o e he cou se o a
cen u y. Wi h a 3% in la ion a e, he p ice le el doubles in less han 24 yea s,
and he p ice le el is mul iplied by nea ly 20 wi hin a cen u y! In o he wo ds,
o e he cou se o a human li e, he mone a y uni would lose nea ly 95% o i s
alue, so ha he esidual wo h o one dolla o one eu o would be li le mo e
han i e cen s, a a c y om p ice s abili y. In any case, a change in he de ini-
ion o p ice s abili y could only be jus i ied i new objec i e, scien i ic indings
ega ding he measu emen o he p ice le el and o i s a e o change became
a ailable, and i hese uly wa an ed a ede ini ion o p ice s abili y. The de i-
ni ion canno be changed simply as a ma e o con enience o o ope a ional
pu poses. Doing so would g a ely endange he c edibili y o he SNB. In my
opinion, he SNB hus has no deg ee o eedom in his a ea.
Gi en he smallness and he openness o he Swiss economy, i s in la ion a e
is qui e ola ile. Fo his eason i is no possible o aim a an in la ion a e close
o, bu jus below he uppe limi o he in la ion ange compa ible wi h p ice
s abili y. Fo ins ance, i he SNB a ge ed an in la ion a e o 1.9%, one can be
almos ce ain ha he esul ing in la ion a e would be in excess o 2% nea ly
hal he ime, which would unde mine i s c edibili y. The expe ience o he ECB,
wi h an a e age in la ion a e o 2.1% since 2004, (i.e. ou side he ange i asso-
cia es wi h p ice s abili y) is qui e elling in his espec .
Ano he impo an issue is wha kind o in e es - a e hypo hesis he SNB
should make when p oducing i s in la ion o ecas , and whe he he in e es a e
pa h should be published. Jo dan e al. ga e some compelling easons why an
in la ion o ecas explici ly based on a cons an in e es a e makes sense. The
public unde s ands i s meaning. This is like cha e ing a cou se when sailing. I
a essel is heading o a ligh house, his does no mean ha i s skippe in ends o
hi i . On he con a y, i sugges s ha a change o cou se will ha e o in e ene.
I ollows ha he SNB o ecas – i should pe haps be called a p ojec ion – is
no di ec ly compa able o con en ional o ecas s. As men ioned by Sa ioz, he
SNB consensus o ecas is no mean o be he bes possible p edic o o u u e
in la ion, bu i is a good p edic o o u u e in e es a e changes! Jo dan e al.
428 Ul ich Kohli
2 See Kohli (2008a, 2008b).
3 See Taylo (2008). Fo mo e on his opic, also see Cù dia and Wood o d (2008).
ga e he p os and cons o using a ma ke a e as a basis o he in la ion o e-
cas . A hi d op ion would be o use a model-based in e es a e, one ha pe -
haps e en e lec s he policy make s’ p e e ences. The di icul ies I see he e a e
a leas h ee old: (i) i he e a e mo e han one policy make hey would ha e
o ag ee on he objec i e unc ion; (ii) i one uses mo e han one model, i is no
clea ha he consensus in la ion o ecas would be cohe en wi h a consensus
o ecas o he in e es a e pa h; (iii) o he ex en ha he in e es a e expec ed
by he policy make s di e s om ma ke expec a ions, obse ed asse p ices,
which end o en e he models as well, may be inconsis en wi h he p ojec ed
in e es a e pa h. Ha ing said his, I am happy o concede ha hese ques ions
dese e o be u he in es iga ed.
The inancial c isis has also b ough o wa d some u he impo an issues
ha had ecei ed li le a en ion in he pas . One such example is he di e ence
be ween he ECB p ocedu e and he SNB s a egy (Jo dan e al; Nau z e al;
Ma in). Whe eas he ECB essen ially ixes he o e nigh isk- ee a e, he SNB,
by a ge ing he 3-mon h Libo , is led o compensa e any a ia ions in he isk
p emium by adjus ing he epo a e. This is wha I ha e dubbed elsewhe e he
au oma ic mone a y s abilize mechanism.2 John Taylo has also e e ed o he
Swiss p ocedu e as being e y help ul in he cu en ci cums ances, since he e
is no need hen o make any ad hoc adjus men s o he Taylo ule.3
Ye ano he ques ion ha equi es mo e hinking conce ns he use o he Libo
as an ope a ing a ge . Indeed, as asked by Jo dan e al., is i he app op ia e ope -
a ing a ge ? Gi en ha he e we e ha dly any ansac ions in he unsecu ed in e -
bank ma ke du ing he c isis one may wonde wha he meaning o he Libo
eally is. Does he SNB a ge some hing ha does no exis ? Maybe, bu I am
no su e ha his is eally a p oblem. P ice s abili y, a e all, is de ined in e ms o
some hing ha does no exis ei he , namely he consume p ice index (CPI). The
CPI is no a ma ke p ice, bu a he an index, an indica o . Many ma ke in e es
a es, including some o he mos meaning ul ones, a e indexed on he Libo , so
his sugges s ha he Libo is indeed impo an . Maybe, hough, we should look
a hings he o he way a ound. Ra he han hinking o he mo gage a e – o
any o he ma ke a e – as Libo plus, say, 75 poin s, i migh be be e o conside
he Libo as he mo gage a e minus 75 poin s! In ha sense, he Libo would be
an indica o o gene al ma ke condi ions, an index so o speak. In his con ex , I
ind i su p ising ha he ma k-ups – o agios – cha ged on mo gages ela i e o
The SNB’s Mone a y Policy F amewo k Ten Yea s On: Concluding Commen s 429
4 See Assenmache and Ge lach (2008), o ins ance.
5 See Angeloni and Faia (2009).
Libo do no seem o ha e changed much du ing he c isis. Indeed, I would ha e
expec ed hese ma k-ups o decline as he isk p emium inc eased since mo gages
a e secu ed loans. Consequen ly, i we hink o he Libo as an index o gene al
ma ke condi ions, a he han an ac ual ansac ion p ice on unsecu ed loans,
i may no ully inco po a e he isk p emium. In ha case, he sp ead be ween
he Libo and he o e nigh indexed swap (OIS) would be a poo measu e o he
isk p emium. I gladly concede ha hese hough s a e a he specula i e a his
s age, which sugges s ha mo e esea ch is needed.
One u he ma e b ough up by Posen is he ques ion o p ice le el a ge -
ing. Should bygones be bygones? The e is a lo o be said in a o o p ice le el
a ge ing, possibly wi h a d i . In pa icula , i i is c edible, i can add an ele-
men o s abili y in case o a p olonged de la ion. Mo eo e , i seems indispu able
ha he manda e o p ice s abili y, aken li e ally, is bes ul illed i he cen al
bank o se s pas de ia ions and hus does indeed keep he p ice le el s able! The
Bank o Canada has ini ia ed a esea ch p og am ha encompasses his ques ion,
which dese es o be pu sued by o he s as well.
One majo issue ha s ill needs conside able esea ch conce ns he place o
inancial s abili y conside a ions in mone a y policy decisions, and he whole
leaning agains he wind a gumen (Rich; Posen). One can a gue ha he SNB
mone a y policy s a egy, by elying on a h ee-yea consensus in la ion p ojec-
ion, al eady akes accoun o de elopmen s in asse ma ke s, pa icula ly so since
se e al o i s o ecas ing models a ach special a en ion o he beha io o mone-
a y agg ega es and c edi . Mo eo e , ecen economic esea ch demons a es ha
in o de o ha e a signi ican impac on asse p ices, mone a y policy would ha e
o be ex emely agg essi e, he eby endange ing economic ac i i y.4 This would
amoun o killing he pa ien while o e coming he disease! The e is also e idence
ha egula ion, a he han in e es a e policy, is bes sui ed o ame inancial
imbalances.5 Finally, one mus no o ge ha policy make s a e no necessa ily
be e han ma ke pa icipan s a iden i ying de eloping asse ma ke bubbles,
and ha asse p ices do no necessa ily all mo e in he same di ec ion, which begs
he ques ion as o which one o which ones he cen al bank should eac o. I,
o one, would a gue ha i he e is one asse p ice ha he cen al bank should
a ge , hen i should be he p ice o he asse closes o i , i.e. money. Tha is,
a ge he eal p ice o money, namely 1/P, which simply amoun s o aiming a
p ice s abili y! Ha ing said his, i is clea ha he SNB is o wa d looking, and
430 Ul ich Kohli
ha i may ake in e es a e s eps be o e p ice p essu es a e disce nible: his is
why i uses a h ee-yea in la ion p ojec ion as i s guide.
Du ing he pas en yea s, he Swiss economy has gone h ough nea ly wo
ull cycles. As a gued ea lie , he SNB’s mone a y policy s a egy has se ed i
well. O cou se, he cu en condi ions a e qui e ex ao dina y. Is he ha des
pa s ill o come? The exi om an excep ional si ua ion mus s ill be mas e ed.
P e y soon, he SNB s a egy will become a eenage . A pa en would see his
coming phase wi h a ce ain amoun o app ehension and anxie y. Howe e , I
belie e ha he SNB has a e y s eady hand, and ha i can he e o e iew his
nex chap e wi h con idence and se eni y.
Re e ences
Assenmache -Wesche, Ka in, and S e an Ge lach (2008), “Ensu ing
Financial S abili y: Financial S uc u e and he Impac o Mone a y Policy
on Asse P ices”, IEW Wo king Pape 361, Ins i u e o Empi ical Resea ch
in Economics, Uni e si y o Zu ich.
Angeloni, Ignazio, and Es he Faia (2009), “A Tale o Two Policies: P uden-
ial Regula ion and Mone a y Policy wi h F agile Banks”, Kiel Wo king Pape s
1569, Kiel Ins i u e o he Wo ld Economy.
Kohli, Ul ich (2008a), “Commen s“, p esen ed a he p ess con e ence on he
occasion o he IMF A icle IV Consula ion o Swi ze land, Be ne, Ma ch 17.
Kohli, Ul ich (2008b), “Is In la ion Ta ge ing Passé?“, p esen ed a he Con-
e ence in hono o Alexand e Swoboda, G adua e Ins i u e o In e na ional
S udies, Gene a, May 30.
Cù dia, Vasco, and Michael Wood o d (2008), “C edi F ic ions and Op i-
mal Mone a y Policy”, p esen ed a he 7 h BIS Annual Con e ence, Luce ne,
Swi ze land, June 26–27.
Taylo , John (2008), “Mone a y Policy and he S a e o he Economy”, es-
imony be o e he Commi ee o Financial Se ices. U.S. House o Rep e-
sen a i es, Feb ua y 26.
