Monetary Policy without Central Bank Money: A Swiss Perspective

At the end of 1999, the Swiss National Bank modified its monetary policy concept and abandoned monetary targeting in favor of an approach based on an inflation forecast. Although central bank money or the monetary base, the SNB's intermediate target variable, was plagued by instabilities, the switch to a new policy framework was motivated by more fundamental problems arising from monetary targeting than the stability of money demand. While the monetary base served as an effective long-run policy anchor, it was not well suited for deciding how the SNB should respond to unexpected shocks, notably exchange rate and cyclical shocks. A policy approach based on an inflation forecast should help the SNB to deal better with such shocks. The paper contrasts the new policy framework with the SNB's experience of monetary targeting. It also discusses two other innovations introduced by the SNB: A definition of price stability, its ultimate policy objective, and an operational target band for the three-month interest rate. R A first draft of this paper was presented at the Conference on the Future of Monetary Policy, sponsored by the World Bank, Washington D.C., July 11, 2000. I am indebted to Michel Peytrignet and Adam Posen for their very useful comments and to Thomas Koch for preparing the figures.