ANNEX: A Monetary Conditions Index (MCI) for Switzerland
References Chapter I. Annex
Corker, Robert, “Indicators of Monetary Conditions,” Chap. 5 in United Germany: The First Five Years. IMF Occasional Paper No. 125 (Washington: International Monetary Fund, 1995).
Fluri, Robert, “Grundlagen zur Revision der Geldaggregate im Jahre 1995,” Quartalsheft Schweizerische Nationalbank (Zürich), Vol. 13 (No. 1, 1995) pp. 76–88.
Rich, Georg, “Monetary Targets as a Policy Rule: Lessons from Swiss Experience” (paper presented at Bank of Canada, June 23, 1995).
This chapter was prepared by H. Vittas, and the annex by A. Lund.
In the first two instances, the Swiss National Bank adjusted its discount rate after money market interest rates had already fallen. The third and fourth cuts, by contrast, were accompanied by explicit official efforts to lower money market rates further by supplying additional base money to the banks.
By contrast to the monetary base (MO), the broader monetary aggregates, notably M1 and M2, are highly sensitive to changes in interest rates. Thus, the acceleration in their rate of increase in recent months is a direct reflection of the impact of falling short-term interest rates and does not, on the basis of historical experience, warrant any concern about future inflation. The growth of M3, the demand for which is not highly elastic with respect to changes in interest rates has remained subdued.
Non-monetary indicators, such as the size and evolution of the output gap and the level and trend of the unemployment rate, also tend to suggest that there may still be some leeway for relaxing monetary conditions further without jeopardizing inflation objectives. However, it is not possible to draw firm conclusions about the appropriateness of the monetary policy stance from these indicators as they have to reflect the effects of the policy easing already implemented and as there is considerable uncertainty about the size of these effects and the length of the lags involved.
The SNB has found, in particular, that the demand for M2 is more stable from an econometric point of view than either MO or M1 and M3.
The underlying current account surplus is derived from the actual surplus after adjusting for the effects of relative cyclical conditions as well as the effects of past exchange rate changes that are still in the pipeline.
The fact that real bond yields in Switzerland are lower than in most other industrial countries can be interpreted as a sign that financial markets expect such a real appreciation over the long run. However, the implied rate of appreciation is much lower than that experienced over the past few years.
Examples include Canada, Norway, Sweden, and the United Kingdom.
The introduction of VAT from January 1, 1995 temporarily increased the measured rate of inflation. To avoid the subsequent drop in the real interest rate, new values for the consumer price inflation were constructed for the first half of 1995 by extrapolating the underlying growth rate from the second half of 1994.
As the reer was available only through October 1995 it was extrapolated through December using the same growth rate as that of the nominal effective exchange rate.
The series in the graph are in accordance with the new definition. Consequently, they were not available and did not serve as guides to monetary policy prior to 1995.