The Central Bank has bought a smaller share of foreign exchange inflows in the recent past than it did earlier in the year, and the króna has appreciated more as a result. This is because the foreign exchange reserves are larger and somewhat above the recommended minimum for liberalisation of the capital controls. The nature of the inflows is important, as is the view that if the currency appreciates due to a rise in the equilibrium real exchange rate, this is part of the desirable countercyclical role of the exchange rate; furthermore, it is not desirable to disconnect the exchange rate channel of monetary policy transmission entirely. Nevertheless, the foreign currency purchases have been substantial, based on precautionary principles concerning the durability of the inflows and attempts to prevent excessive appreciation of the currency in advance of liberalisation-related outflows. In the wake of the Central Bank’s large foreign currency purchases this year, the question has arisen whether large foreign exchange reserves are a problem in and of themselves; i.e., whether they jeopardise the Bank’s finances to such a degree that they could undermine its ability to pursue appropriate monetary policy at any given time. We do not have time to explore this in depth here, but the short answer is: no, they are not. First of all, we must not focus only on the cost of financing the reserves; we must also consider the benefits associated with them.
Philipp M Hildebrand: Monetary policy in a global context Speech by Mr Philipp M Hildebrand, Member of the Governing Board of the Swiss National Bank, at the Swiss-American Chamber of Commerce, Zurich, 8 October 2003. *  *  *  It is a special privilege to be able to give my first formal address as a central banker before the distinguished audience of the Swiss-American chamber of commerce. I have always been very fond of the Swiss-American friendship. It has been an integral part of my family’s life for several decades. More importantly, I am convinced it is an essential ingredient to the long-term vitality of the Swiss economy. Like any friendship, it has had to endure difficult moments. The vibrancy of your association is testimony to the fact that the cultural affinities and common interests between our two countries provide a reliable foundation for extensive and mutually beneficial economic relations. Let us strive to make this foundation as solid as the public service record of the Geneva-born Albert Gallatin, whom Thomas Jefferson appointed as the fourth Secretary of the U.S. Treasury in 1801. To this day, Gallatin remains not only the longest serving Treasury Secretary in the history of the United States but the only Swiss-American to have occupied that most prestigious position in the then newly established capital in Washington D.C. My focus today will be on the long period of global disinflation following Paul Volcker’s paradigmatic shift of monetary policy in the United States.