There also needs to be greater clarity about the Fund’s obligations, and how it is to be held to account for fulfilling them. A new Surveillance Decision The 1977 Surveillance Decision needs to be replaced by a coherent and comprehensive set of principles covering all aspects of the Fund’s surveillance. A new Decision should start from the overarching objective to promote external stability. Consistent with this, it should shift the emphasis toward multilateral surveillance and the analysis of policy spillovers. And, unlike the 1977 Decision, it should cover both exchange rate policies and domestic policies insofar as they may affect external stability, rather than exchange rate policies, per se. This is a key area where the consensus has moved on since the late 1970s. It is now well recognised that exchange rate policies cannot be divorced from domestic policies. Where exchange rates are allowed to float freely, the paths they take will be affected by a wide range of domestic factors, including both monetary and fiscal policies. These policies can have significant foreign exchange and spill-over effects even when they are not implemented for an explicit balance of payments purpose. But even where nominal exchange rates are pegged, competitiveness and hence  4  BIS Review 103/2006  trade flows depend crucially on relative inflation rates, which reflect domestic monetary and financial policies. So both the effects of a fixed exchange rate, and questions about whether such a peg is sustainable at a given level, depend fundamentally on other domestic policies.
When I attend conferences and seminars at other central banks, my foreign colleagues often assume that such a policy must have been tremendously popular. Indeed, the economics behind it is straightforward, and the resulting boost to peoples’ wages is hard to deny. In spite of that, the exchange rate commitment caused the sharpest ever deterioration of public confidence in the Czech National Bank: from around 75% to around 50%. Confidence only recovered after the commitment was terminated. These were precisely the times when its hard-won independence had to be put to work. Thus, central bank independence built into the country’s law code is a treasure without which price stability is rarely possible. But equally important is the perception of independence by central bankers themselves. This perception, in turn, depends on the compatibility of the monetary policy regime with the preferences of the population. It is often overlooked, however, that central bankers have an impact on these preferences. Rhetoric matters a great deal, and communication is now one of the most potent tools of monetary and other policy. True, enhancing financial literacy and altering public preferences in the process is a thankless, tiresome, long-term job, one that is often only appreciated years or even decades later. The man responsible for instilling a low-inflation mentality in Czechs, Alois Rašín, was shot dead in 1923 by a young communist. At that time, Rašín’s policies were very unpopular among some groups of the population.