Monetary policy during financial crisis a tough job: Jordan
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Mr Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank addressing at the Swiss Banking Global Symposium said he would also like to thank Katrin Assenmacher, Rita Kobel and Peter Kuster for their helpful comments, and also extends his thanks to the English Language Services.
When the Swiss Bankers Association was founded 100 years ago as Vertreter des schweizerischen Bankgewerbes, or Representatives of the Swiss Banking Trade, this step was warmly welcomed by the Swiss National Bank (SNB).
Surprisingly, perhaps, the senior representatives of the SNB were even members of the Association between 1916 and 1937. Since that time, of course, the role and the tasks of cen- tral banks have changed significantly.
It would be unthinkable for the SNB nowadays to belong to a private sector interest group.
Nevertheless, I am happy to observe today that the relationship between the SNB and the Swiss Bankers Association has remained good and reliable over the years.
The Swiss Bankers Association has been a key dialogue partner for the Governing Board on all matters relating to the financial centre, and continues to be so.
My topic today is the monetary policy which central banks have pursued during the past few years to manage the financial and economic crisis. I will discuss the impact of the various conventional and unconventional measures, and I will talk about the risks. Since the beginning of the crisis, the expectations placed in cen- tral banks by politicians, media and the general public have increased substantially.
Therefore, I will also touch upon the political economy risk with respect to the independence and mandate of central banks. In line with the title of this symposium, I will be extending my view beyond the SNB and Switzerland.
The response of monetary policy from 2008 to 2012
The crisis began in the financial sector, and it was possible to deploy monetary policy rapidly and effectively. As a consequence, central banks were in the front line right from the start.
Following the collapse of Lehman Brothers in autumn 2008, they rapidly reduced short-term interest rates: in Switzerland, the US, the UK and Japan to almost zero percent; in the euro area and many other countries to historically low levels slightly above zero.
The aim of these interest rate reductions was to stabilise the financial system and mitigate the looming deep recession. They also served to counter deflation expectations and prevent a negative price spiral.
With short-term nominal interest rates close to zero, further interest rate reductions were soon impossible. This meant that conventional monetary policy, in other words, managing the economy via short-term interest rates, was no longer an option. Yet concerns that monetary policy might lack any further instruments were unfounded. The measures that can still be used are often described as unconventional in order to distinguish them from the customary instruments.
Most central banks in advanced economies make use of these unconventional measures.
While the Federal Reserve and the Bank of England are chiefly focused on ensuring a more expansionary monetary policy, the goals of the European Central Bank (ECB) and the SNB are somewhat different. In the case of the ECB, its unconventional measures are directed against disruptions in the transmission mechanism of monetary policy arising out of the deterioration in government finances and credit conditions in the single currency area.
TheSNB, for its part, took a stand against an unwarranted tightening of monetary conditions as a result of the strength of the Swiss franc - a strength whose origin was to be found in international developments.