Abstract
After the switch to a floating exchange rate in 1973, the Swiss National Bank at first adopted annual monetary targets and in the 1990s shifted to a medium-term targeting strategy. In this paper I review the SNB’s internal policy analysis, an aspect of Swiss monetary targeting that has received little attention in the existing literature. I show that money played a key role in setting monetary policy and in communicating the SNB's decisions to the public. Due to the adoption of monetary targets, the SNB was able to reduce the inflation trend to low levels. However, it was less successful in preserving price stability during business-cycle expansions because the monetary targets did not call for a sufficiently pre-emptive policy stance. At the end of 1999, the SNB abandoned monetary targeting in favour of an approach based on inflation forecasts.
Highlights
The Swiss National Bank (SNB), Switzerland’s central bank, adopted monetary targeting at the end of 1974
The SNB continued to employ the analytical procedure established at the end of 1974, except that it relied on forecasts for growth in nominal final demand, rather than for output growth and inflation (Table 2)
It was convinced that the overhang had been completely eliminated, both in terms of the monetary base and M1, an assessment confirmed by subsequent research (Kugler and Rich, 2002)
Summary
The Swiss National Bank (SNB), Switzerland’s central bank, adopted monetary targeting at the end of 1974. The medium-term strategy ran up against a number of difficulties, the SNB at the end of 1999 decided to abandon monetary targeting altogether and to switch to a policy approach based on inflation forecasts. These studies examine the choice of monetary aggregates, as well as the reasons for switching to a medium-term targeting strategy and for abandoning monetary targeting They assess critically the SNB’s record in achieving and maintaining price stability, and in communicating its policies to the public. They discuss the advantages and disadvantages of the various targeting approaches followed by the SNB, they only throw limited light on a crucial aspect of monetary targeting.
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