In the data, there does appear to be a degree of “smoothness” in the way official interest rates behave. Rather than jumping from one level to another, factoring in all the news at once, the policy rate usually seems to respond to it over time. Two explanations have often been suggested. One is uncertainty about the impact of changes in official interest rates. If there’s a degree of imprecision in estimates of policy multipliers there’s a case for moving a little more gingerly than otherwise. Another, offered by the economist Michael Woodford, is that smoothing the spot interest rate gives the central bank better control of medium-term interest rates, which may matter more in the transmission of policy. In this case I think a third factor may be at play, namely the need to learn about the extent of these “second-round effects”. We have inevitably had to learn about them and, therefore, to respond to signs of more persistent domestic inflation as and when they emerge. Bank of England  Page 15  The response to demand shocks This is less the case when it comes to plain-vanilla shifts in aggregate demand. These are more common and the appropriate response is well understood: an inflation-targeting monetary authority has to lean against them. Indeed, one additional reason for caution, in the face of these big rises in import prices and their impact on domestic inflation, has been the likelihood that they will also weigh significantly on domestic demand.
The greater price transparency in the European market brought about by the euro’s launch also has an influence on Switzerland’s domestic economy, heightening awareness of the need for structural changes. Finally, initial fears that the exchange rate relation between the Swiss franc and the euro might be destabilised by the introduction of the euro have not come true. Notwithstanding a few fluctuations, the relation between the two currencies has remained remarkably stable. Overall, therefore, the cohabitation between the Swiss franc and the euro is definitely a “success story”. BIS Review 49/2003  1