I will conclude my speech by addressing the thorny question of the choice of a monetary policy regime. After all, is it worthwhile for a country in the vicinity of a large monetary zone the euro zone or the dollar zone - to try to conduct an autonomous monetary policy? Switzerland’s tradition of financial stability Many people outside Switzerland think that financial stability should be added to the list of Swiss specialties like chocolate, watches and banks. Indeed, the fact that Switzerland is the only country that has been able to keep unchanged its set of coins in circulation since the franc was created in 1850 speaks for itself. Even more spectacular is the position of the Swiss franc, which has retained its international purchasing power over time. The Swiss franc has been devalued only once, in 1936, during the Great Depression, following the devaluation of all major currencies. Financial stability has contributed to shape Switzerland’s business environment and, to a certain extent, explains some of the typical features of the Swiss economy. For example, with about 32% of GDP, the Swiss saving rate is among the highest in the world. Some of these savings are channelled abroad via our banking system, and their proceeds guarantee us a very strong balance of payments position. As a matter of fact, Switzerland’s current account is almost endemically positive.
On the contrary, most empirical studies, as you know, show that there is a negative relationship between inflation and output in the long run. Inflation is a tax on financial assets; it distorts investment decisions and increases overall uncertainty. In Switzerland, monetary stability has become part of the country’s culture and has been the guideline of monetary policy for more than 30 years now. After the collapse of the Bretton Woods system in 1973, the Swiss National Bank made it clear that the overriding objective of its policy was to preserve long-term price stability. Convinced that inflation was a monetary phenomenon, it opted for a strategy aiming at a steady growth of the money stock in line with the potential growth rate of the economy. At the time, the Swiss National bank was actually one of the first central banks to adopt a rule-based strategy. Between 1975 and 1999, we implemented a “pragmatic” policy, with monetary targets serving as benchmark and communication devices. Here I would like to emphasize the term “pragmatic”, because it was never the goal of our policy to fulfil monetary targets mechanically. As a small economy with an international currency, we had to face severe exchange rate shocks or money demand instability. In such circumstances, pre-announced monetary targets could not be met. In these particular and difficult periods, however, we never gave up our objective of preserving price stability in the long term. In the late 1990s, day-to-day implementation of monetary targeting turned increasingly difficult because of financial innovations.