To add something else would be to double-count the effect. Macro models and the determination of demand As an undergraduate one of the books I had to read was a collection of essays about monetary economics by one of my lecturers, Frank Hahn. It begins with this rather provocative sentence: “The most serious challenge that the existence of money poses to the theorist is this: the best developed model of the economy cannot find room for it”. As a newcomer to the subject I found this a bit concerning (not to say alarming). If economics can’t even say why money exists how can it hope to explain what it does? Reading on, one’s concern subsided a bit. Hahn was, by training and inclination, a general equilibrium theorist. For him, as he explained in the very next sentence, “the best developed  Page 8  model of the economy” was the highly stylised description developed by the great economic theorists Ken Arrow and Gerard Debreu. For all its sophistication, the Arrow-Debreu model is one in which, by assumption, trade is entirely costless. In this perfect economy there’s a market and a price for the exchange of any two goods or services – including those for future delivery – without the need for a medium of exchange or any sort of costly financial architecture. So it’s not a huge surprise that, having ruled out at the start the conditions that might require it, this model should “have no place” for money.
In the case of the SNB, foreign currency investments have increased substantially as a result of foreign exchange interventions. This has exposed the SNB to a substantial exchange rate risk, which is a consequence of monetary policy considerations. Consequently, it is one that the SNB must take. We reduce the risks through suitable diversification of our foreign currency investments. However, the primacy of monetary policy means that our scope for diversification is limited.4 Additional risks in connection with zero interest rate policies can result from the fact that it has become very difficult for investors to achieve a satisfactory return on bonds. There is a danger that investors seeking an attractive yield will become imprudent and take excessive risks. The longer a low interest rate phase, the greater the danger of unintended consequences in the form of speculative price developments and misallocations. We have been observing a substantial increase in real estate prices in Switzerland for some years now, with strong growth in mortgage loans. The SNB has repeatedly expressed its concern over these developments. Prolonged low-interest phases also present the insurance industry and pension funds with considerable challenges. It goes without saying that central banks continually evaluate and reassess the effects and risks of monetary policy in the light of the most recent data. This applies in normal times and even more so in exceptional situations such as we have experienced over the past few years.