This is despite the well-known difficulties in determining the GDP gap.14 I believe that one can make a fairly good assessment of the GDP gap by combining a production function approach with business tendency data and other short-term statistics.15 GDP is a central variable in the forecasting work and the variable that, despite its well-known deficiencies in measuring welfare, is most closely-related to welfare.16 We should also report fan charts with uncertainty bands for the GDP gap and other measures of resource utilisation, in particular unemployment, to illustrate the uncertainty in these measures, too. It is important to make good judgements of resource utilisation at the outset and to endeavour to ensure it is neither too high nor too low in the coming period. This can contribute to stabilising inflation close to the target. Resource utilisation is namely not only a target variable, but also an indicator of future inflation. Figure 10 shows the correlations between some measures of resource utilisation – GDP gap, hours worked gap, labour  13  See the Executive Board’s consultation response to the report “Evaluation of the Riksbank’s monetary policy and work on financial stability 2005–2010” (2010/11:RFR5), Sveriges Riksbank, 30 November 2011. 14  See, for example A. Orphanides, “Monetary Policy Lessons from the Crisis”, Central Bank of Cyprus, 2010. 15  See earlier speeches: S. Öberg, “Monetary policy and the elusive resource utilisation”, 25 May 2009; S. Öberg, “Potential GDP, resource utilisation and monetary policy”, 7 October 2010; and S. Öberg, “GDP growth and resource utilisation”, 6 October 2011.
First, banks play a crucial part in the transmission of monetary policy. There are various channels through which monetary policy is transmitted to the economy, but the primary channel is via changes to the short-term nominal interest rate, in other words, via the cost of borrowing and the return on savings. Monetary policy thereby affects investment and consumption decisions throughout the entire economy, thus influencing business level activity and price dynamics. In its implementation of monetary policy, the SNB provides short-term liquidity to the banking system, and not directly to firms and households. Banks, as financial intermediaries, in turn transmit these monetary policy decisions to the real economy. The extent, however, to which the banks respond to these decisions – by changing their interest rates on deposits, loans and their credit supply – depends on a number of factors, such as the degree of competition, but also the banks’ balance sheets. The effects of monetary policy can thus be impaired if banks have poor balance sheets. Thus, the banks’ function as financial intermediaries is a welcome and influential channel through which the SNB’s monetary policy decisions affect the economy. There is, however, a downside to this role. The banking sector can also propagate large financial shocks to the rest of the economy. In other words: the financial industry itself can have a large impact on the economy. In Switzerland, the propagation of financial shocks to the real economy is potentially large in magnitude.