It is impossible to determine with some degree of accuracy whether such a bubble, in the sense of a speculation-driven price increase, has indeed formed. Central bankers are not more ignorant than investors and traders, nor are they more intelligent or better informed when it comes to the valuation of companies. One might argue that a crash is not so much the result of exuberant cash flow expectations for individual companies but rather the consequence of a sudden increase in discount rates, causing a dramatic downward adjustment of all present values. The relevant discount factors are the combined result of time preference, risk preference, and the prevailing perception of uncertainty. History has taught us convincingly that time preference is a relatively stable factor. The problem, therefore, lies more in a sudden shift of risk preference and the perception of uncertainty. If these two determinants could be stabilised, much would be achieved already. This task, however, also presupposes some “superior knowledge” and “deeper insight” on the part of central banks relative to the market. Such assumptions are unrealistic. Moreover, central banks, with the instruments they have at their disposal, do not have the possibility to deflate a presumed bubble all on their own. Interest hikes would certainly be a possibility. In so doing, however, one would have to accept consequences in the real sector which could be completely counterproductive. Finally, if central banks were obligated to avoid stock market excesses, this would have extremely disastrous moral hazard implications.
It is determined by the structure of the economic process and the dynamics of expectations. There is, realistically speaking, no chance to deduce a general policy rule and to formally embody such a rule in the central bank mandate. Any decision to correct slowly and gradually or in a single bold effort any deviation from price stability, whatever its origin, can only be taken individually. Monetary history has successful examples to show for both patterns of reaction, but also unfortunate episodes in which central banks actually increased the variability of the price level and of output through activist manoeuvres. It would thus appear reasonable that an addendum, unspecified as to substance, should be made to the mandate of ensuring price stability. For example, to the effect that in fulfilling the mandate due attention should be paid to the development of economic activity. Art. 99 of the Swiss Federal Constitution obliges the SNB to conduct a monetary policy which serves the general interests of the country. Endeavours are under way to spell out this vague formulation in  BIS Review 35/2000  4  more detail in the forthcoming comprehensive revision of the National Bank Law. When revising our monetary policy concept, we took a step in this direction by quantifying the stability target (CPI inflation below 2%) and undertaking to adhere to the target in the medium term. Transparency A further aim was to continue to improve transparency. It is a fact that the call for more transparency has sounded far and wide.