Swiss monetary policy facts… and fiction

Trying times for SNB. Jean-Pierre Danthine of the central bank defends its policies.

In one if the myths it says central bank does not have unlimited powers as it is imagined:

The drastic actions taken by central banks since the financial crisis – flooding financial markets with liquidity on an unprecedented scale, injecting billions to save banks from failing, or, in the case of Switzerland, intervening heavily in the foreign exchange markets – have led to the widespread perception that central banks have unlimited power.

On the one hand, this perception is based on the fact that central banks are entrusted with the note-issuing privilege, i.e. they can “print money”. In view of the current difficult debates about austerity and deleveraging, the tendency to overrate the power associated with this privilege is probably natural. Yet this view overestimates its actual power, for printing money can only resolve short-term liquidity issues. In the long term, it creates no value and merely generates nominal price increases.

On the other hand, the perception that central banks are all-powerful is also based on the fiction that their independence renders them immune to democratic controls.

It is a fact that today, most central banks are granted significant independence. This holds also for the SNB, which, by law, is functionally, institutionally and financially independent, as well as with regard to personnel issues, from the Federal Council, the Federal Assembly and any other body. 4

There are compelling reasons for this delegation of monetary policy power to an independent central bank: It is a fact both in theory and practice that an independent central bank better fulfils its mandate, namely, ensuring price stability and thereby contributing to sustained economic developments, than a central bank that is under the influence of political interest groups.

However, a further important fact in this regard is that the SNB’s independence is far from unlimited.

First, our independence is not an end in itself. It applies only to the pursuit of a clearly specified mandate. This mandate is defined in the political realm. It is stipulated in article 99 of the Federal Constitution and set out in detail in the National Bank Act. 5

Second, independence goes hand in hand with accountability. With the privilege and duty of conducting an independent monetary policy comes a particular responsibility. As bearer of this responsibility, the SNB is accountable to the Federal Council, the Federal Assembly and the public for the decisions it takes, the means it chooses and the results it achieves. The precise scope of this accountability is also clearly defined in the National Bank Act. 6

Yet having a sound legal framework in place is clearly not enough. Just as important is how these rules are put into practice.

In normal circumstances, such as those before the crisis, this is a rather easy task, since the public and politicians understand “conventional” monetary policy quite well. People have a clear picture of how central banks act and communicate. In such times, the requirements of accountability and transparency are satisfied without undue controversy through a number of measures, namely, the annual accountability report submitted to parliament, regular meetings with the Federal Council and representatives of the relevant committees of the Federal Assembly as well as with representatives from different economic sectors, and the half-yearly media news conferences covering the current conduct of Swiss monetary policy.

This has changed with the crisis. Given today’s circumstances and the SNB’s monetary policy decisions over the last couple of years, public authorities, the general public and financial markets all require substantially more information and transparency from the SNB.

We are very aware of the legitimacy of these requests, and have responded in various ways. The SNB has strengthened its communication by significantly enlarging the scope of information available on its website. 7 Furthermore, Governing Board members have appeared on numerous occasions before parliament committees, on public panels, as well as in print and electronic media, to explain significant monetary policy measures, such as the UBS bail-out, as well as the introduction and discontinuation of the minimum exchange rate.

However, transparency is not a goal in itself, but rather a means to achieve accountability, and it has its limits. It cannot be allowed to hamper the implementation or the effectiveness of monetary policy. An obvious example here is the discontinuation of the minimum exchange rate, when it was impossible for the SNB to give any kind of advanced warning of this decision without triggering speculative attacks on the EUR/CHF exchange rate.

In short, it is a fiction that the SNB has unlimited power. It is a fact that Switzerland has a well-developed system of checks and balances obliging the SNB to transparently account for its decisions.

 Really? Who would believe this given SNB’s exceptional intervention..

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