The New Keynesian IS curve in the euro area This brings me to the second channel I would like to discuss this morning: the effects of monetary policy on real economic activity. 7 / 14  BIS central bankers' speeches  Much of our attention recently has been focused on the properties of the Phillips curve – that it may be flatter, non-linear or mis-specified in terms of the relevant economic slack. By now, we are fairly confident that non-linearities and broader labour market slack are likely to explain much of the weakness in inflation as of late.10 Some observers have interpreted the lack of stronger price pressures as a failure of monetary policy to stimulate the economy. They argue that persistently low inflation is testimony to the ineffectiveness of non-standard policy measures. If this were true, then also the reasoning behind the shock-based exchange rate pass-through would in part be misguided. I would argue, however, that such claims reflect a serious misunderstanding and simplification of how monetary policy works. There are very few instances, such as through the exchange rate, where policy can directly affect prices. In most cases monetary policy transmits to prices through its impact on the intertemporal allocation of consumption, savings and investment. If prices are slow to adjust, a cut in the key policy rate lowers the real interest rate, which, in turn, stimulates interest-sensitive spending.
Jean-Pierre Roth: Central bank communication policies and the challenges posed by the financial crisis Summary of a speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank and Chairman of the Board of Directors of the Bank for International Settlements, at the presentation of the “BZ-Preis für Lokaljournalismus”, Berne, 27 November 2008. The complete speech can be found in French on the Swiss National Bank’s website (www.snb.ch). *  *  *  The financial crisis has prompted a rekindling of press interest in central bank operations, following a long period in which monetary authorities scarcely attracted any media attention. Our communication policy has thus been faced with new challenges in recent months. Today, central banks operate with the market, rather than “against the market”, as in the past. Financial market participants are therefore able to foresee central bank actions. Since the early 2000s, our communication policy has focused on transparency, and our experience with this has been positive. Thus, transparency increases the effectiveness of monetary policy. Yet, in the recent financial turbulence, transparency in monetary policy operations also turned out to be a double-edged sword, as communication problems arose. Indeed, there is a risk that operations to provide extraordinary liquidity assistance will impair the reputation of the recipient organisations, and thereby destabilise the market. There are a number of possible solutions with which a balance can be achieved between transparency and stability. BIS Review 147/2008  1