Jean-Pierre Danthine: Monetary policy is not almighty Speech by Mr Jean-Pierre Danthine, Vice Chairman of the Governing Board of the Swiss National Bank, at the Journée Solutions Bancaires, Geneva, 31 May 2012. *  *  *  Ladies and gentlemen, It is a great pleasure for me to be here with you all today. At the outset, please allow me to thank the organisers at Unicore for having invited me to speak at the 14th Journée Solutions Bancaires to be held here in Geneva. Today, I will reflect on what monetary policy can and cannot do. I would like to emphasise where central banks’ powers and responsibilities end and where those of fiscal policy and the private sector begin. “Why is he focusing on this now?” I hear you ask. “We are in the midst of a crisis. Shouldn’t he be emphasising what central banks can do, instead of what they cannot?” My answer to you is this: while the monetary policy measures taken in recent years have had a stabilising effect, today, monetary policy has acquired a degree of prominence that could lead to its powers and its reach being overestimated. Central banks are far from almighty and, in efforts to emphasise this, I will review the various policy options at the zero lower bound and the risks associated with the measures currently in place. I will first examine the issue in universal terms, before concentrating on the very unusual case of Switzerland.
The scale of central bank intervention has been significant, as indicated by the combined balance sheets of central banks in the US, the UK, the euro area, Japan, China and Switzerland, for example. The total now amounts to some USD14 trillion (slide 4), i.e. over 30% of GDP in these currency areas. These exceptional monetary policy measures do, indeed, appear to have exerted downward pressure on interest rates, thus sustaining the real economy in the spirit of the IS/LM model. What are the risks associated with these policies? Despite these positive (short-term) effects, I would first like to argue that the general message of the IS-LM diagram has not been invalidated by recent central bank actions. That is to say, when interest rates are close to zero, it is most appropriate to resort to fiscal policy and monetary policy becomes less effective. Moreover, the current policy-mix can entail risks, to which I would now like to draw your attention. My greatest concern is that the general public could come to overestimate the impact of central banks’ actions and the suitability of their intervention in each and every  1  For a discussion of the impact of fiscal measures in Switzerland between 2008 and 2010, see, “Die Konjunkturmassnahmen des Bundes 2008–2010: Evaluation der Konzeption und Umsetzung der Stabilisierungsmassnahmen,” Swiss Federal Audit Office, May 2012. 2  BIS central bankers’ speeches  economic situation that is deemed “unsatisfactory”. This could result in central banks being perceived as all-powerful, though such expectations are far from realistic.