Even though, in August and September, there was still frequent talk of an imminent overheating and markets were expecting a further increase in interest rates, we did not become active. It seemed likely to us that the signs of a slowdown would soon become more marked both in Switzerland and abroad. This stance was not without risks. In monetary policy, as elsewhere, one occasionally needs some good luck. In the current environment, we consider the position of the target band to be appropriate. The Libor rate has sufficient leeway in the 3% to 4% bracket to reflect current fluctuations driven by the market. Of course, we will carefully observe and analyse ongoing developments and take action if necessary. Our mission is clearly oriented towards achieving a high degree of price stability in the medium term while taking into account the economic development. Two years of experience with the euro has taught us that living as a dwarf moving among giants is a reasonable strategy. It has allowed us to implement our own policy and at the same time to retain our traditional interest rate bonus, a significant economic advantage. Rather than obstructing our monetary policy during this time, the floating exchange rate has facilitated, even supported it. When we wanted to pursue an expansionary course in 1999, the Swiss franc remained weak. And when, in the first quarter of 2000, we took corrective action by adopting a more restrictive course, it appreciated against the euro without overshooting.
1973, P. 208  BIS Review 2/2001  1  against the yen. It took place in an environment where neither current nor expected inflation differentials have changed to any noticeable extent. Second, the volatility of floating exchange rates by far exceeds the volatility of the fundamentals. It is impossible to explain short- and medium-term exchange rate fluctuations with the aid of traditional fundamental factors such as inflation and productivity differentials. Against the background of such experiences, it is hardly surprising that two considerations characterise the ongoing discussion on currency regimes. First: Floating versus pegging is not a question of right or wrong. What seems appropriate for one country may be a bad choice for another economy. Structural differences in trade flows, productive capacities, features of the financial sector and the credibility of the political process may result in different choices. Second: Even among ardent protagonists of floating the dogmatic position that central banks should take an attitude of benign neglect towards exchange rate movements is out of favour. The exchange rate is generally regarded as a core determinant of monetary conditions to be carefully taken into account when money market interest rates are set. This aspect of policy making is of particular importance in small and medium-sized, open economies. Short- and medium-term adjustments – Muddling through in ignorance Taking the Forex environment into account, however, does not mean actively steering exchange rates by fine-tuning. Such an endeavour would not only jeopardise stability goals.