Monetary policy in the financial crisis - Measures, effects, risks

Swiss Banking Global Symposium, Zurich, 16.11.2012

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Central banks all over the world reacted to the financial and economic crisis with expansionary monetary policies. When short-term interest rates reached the zero lower bound, they continued this through unconventional measures. These unconventional instruments include signalling the path of future short-term interest rates in order to exert pressure on medium and long-term interest rates (forward guidance), purchases of medium and long-term securities with the same aim (quantitative easing), and foreign currency purchases in order to influence the exchange rate.

The Swiss National Bank (SNB) set a minimum exchange rate against the euro on 6 September 2011. Since then, the SNB has made it perfectly clear that it is prepared to enforce this minimum rate through unlimited foreign currency purchases, if necessary. The objective is to prevent severe damage to the Swiss economy from a substantial and possibly long-lasting overvaluation of the Swiss franc.

Conventional and unconventional measures taken by central banks have helped to prevent the global economy from drifting into deflation and depression. However, the very expansionary global monetary policy is also associated with a number of risks. One danger is that central banks will be overburdened. The slow recovery of the global economy reminds us that monetary policy is not in a position to solve all problems. Fiscal consolidation and the structural reforms required for the improvement of growth potential in many countries cannot be replaced by monetary policy measures. For monetary policy, the maintenance of long-term price stability remains essential.