Financial markets and monetary policy implementation - an evolving relationship

November 17, 2016
Money Market Event, Geneva


Since the global financial crisis in 2008, the relationship between monetary policy and the financial markets has shifted in some respects. From a central bank perspective, this shift mainly affects the transmission of monetary policy - that is, how monetary policy stimuli are passed on to the economy and prices via the financial markets. Prior to the financial crisis, central banks used a single instrument to implement their monetary policy. As a rule, this was a short-term interest rate steered more or less directly by the central bank. Thus, monetary policy transmission started with the money market and, from there, was transmitted to the economy via a number of different channels - including interest rates, credit, exchange rates and asset prices.

During the financial crisis, central banks reduced their reference rates to levels of or close to zero. The conventional interest rate instrument had thus reached its limits, according to the prevailing view at the time. In order to ensure the continuing transmission of monetary policy, central banks turned to unconventional measures, some of which no longer use the money market but instead target the capital and foreign exchange markets directly. This has increased the sphere of action of monetary policy, and the influence of central banks on the financial markets has expanded as a result.

The use of unconventional measures poses some challenges for the implementation of monetary policy. For the Swiss National Bank, whose monetary policy is based on a negative interest rate and foreign currency purchases, it was necessary to deepen its understanding of the market, refine its analytical tools and strengthen its market contacts.

If central banks exert a greater influence on financial market prices than previously, this could result in these prices becoming disconnected from the real economic environment, and only reacting to monetary policy. In fact, we observe that some traditional relationships and correlation patterns on the financial markets have changed in recent years. However, in addition to unconventional monetary policy measures, this is also due to the globalisation of financial markets and parallel economic and price developments. Moreover, the phenomenon of interpreting bad news from the economy as good news for the markets already existed before the financial crisis, especially on the equity markets. The question of just how much the greater activity of central banks on the financial markets has changed the traditional price relationships and correlation patterns is difficult to answer definitively. Ultimately, financial market prices continue to reflect investor expectations for the future development of the economy and inflation.

Download file now

The file can be downloaded with the button below.

Additional files

Related content


  • Andréa M. Maechler
    Member 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'.