Abstract
Summary In January 2000 the Swiss National Bank adopted a new monetary policy framework incorporating a price stability objective defined as (any rate of) CPI inflation below 2 percent. We contrast this framework with inflation targeting strategies and review the SNB’s policy decisions since its introduction. Empirical results indicate that in setting policy the SNB reacts in much the same way as inflation targeting central banks. The recent sharp reduction in the policy rate is consistent with the estimated reaction function until the second quarter of 2009 when the zero bound became binding, while the deterioration of economic conditions still called for further monetary easing. This may explain the unconventional monetary policy measures adopted since then.
Highlights
Ten years ago the Swiss National Bank (SNB) announced a new monetary policy framework to take effect from January 2000
How different is the SNB framework from inflation targeting frameworks adopted by many other central banks? Do the differences matter in practice? Should other central banks consider adopting this framework? How has the strategy been implemented in practice? Can it be described by an interest rate reaction function similar to those which characterize the behavior of other central banks?
The leading indicator is highly significant as are inflation and level of the nominal effective exchange rate. Since the latter variable is defined such that an increase denotes an appreciation, the results suggest that the SNB tightens monetary policy in response to a more depreciated exchange rate, presumably because it raises inflation, both directly by increasing the domestic currency price of imports and indirectly by expanding aggregate demand, and because it influences the level of economic activity
Summary
Ten years ago the Swiss National Bank (SNB) announced a new monetary policy framework to take effect from January 2000. The penultimate section of the paper contains an evaluation of the monetary policy decisions during the past year during which the policy rate was reduced by 250 basis points This relaxation of monetary policy is broadly in line with what our estimated reaction function would have predicted, except it appears that the zero lower bound became binding around the first or second quarter of 2009. This may explain why the SNB undertook a series of measures that might be called quantitative easing, including measures to prevent the Franc from appreciating further in the foreign exchange market.
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