Ultimately, protectionism could also change the long-run equilibrium values, i.e. the levels to which an economy tends over the long term. These play a decisive role in determining the monetary policy stance since they serve as a compass for central banks. Increased uncertainty regarding the growth potential of a more closed off economy could result in misdirected monetary policy. If a central bank’s estimate of growth potential on the basis of previous  6  Empirical evidence that increasing globalisation has made prices less sensitive to domestic demand can be found in International Monetary Fund (2006). Cf. also Bank for International Settlements (2018). Page 6/9  conditions is too high, there is the risk of overly expansionary monetary policy delivering unnecessary stimulus to the economy and generating inflation. All in all, we can say that a wave of protectionism would create a lot of uncertainty, be it with regard to the short-term development of the real economy and prices, or with regard to the longer-term macroeconomic context. It is true to say that central banks have to constantly contend with structural change in the economy in any case; that is indeed part and parcel of what we do. However, protectionism would additionally complicate monetary policy. The risk of monetary policy mistakes would increase, at least while the economy is in the process of adapting to the changed market conditions. Rules rather than isolationism As a small open economy, Switzerland would be hit hard by a trade war.
Yet, since 2008, many governments have actively used fiscal policy to combat the effects of the crisis and to refinance the banks. As a result, the debt-to-GDP ratios of G7 countries, for example, have increased by an unweighted average of almost 30 percentage points (slide 3). As a consequence, today, the option of implementing new fiscal stimuli has been virtually ruled out. Monetary policy: in the frontline once again When it comes to economic policy matters, central banks have, therefore, returned to the limelight somewhat by default. In the current crisis, monetary policy has proved more effective than the IS/LM model might suggest. This is essentially because central banks have resorted to using various combinations of conventional and unconventional measures to help provide conditions conducive to economic growth in a context of deflationary risks . Here, the aim has often been to impact long rates directly, given that it was no longer possible to influence short-term rates. Several central banks have therefore purchased assets to put pressure on their longerterm yields (quantitative easing). To the same end, some have extended the maturity of the assets on their balance sheets, while others have purchased private sector assets to contribute to the easing of market conditions (credit easing). Meanwhile, others have conducted foreign exchange interventions to reduce pressure on the export sector and to ease monetary conditions. Many have also made implicit or explicit long-term commitments to foster expectations of future low rates.