Nevertheless, these regulations do not apply to all participants in U.S. money markets. Paul Tucker’s presentation will discuss a number of the broader costs and benefits of such potential flexibility for the role of central banks in democratic societies. Another important aspect of the future framework is that it should be as transparent as possible. Market participants can make better decisions if they have a clear understanding of the way the central bank operates and can anticipate its actions in a wide range of circumstances. Indeed, it is well understood that in the case of coordination failures, a commitment to maintaining liquid markets can prevent illiquidity from occurring, in some case without even having to intervene. For example, during the crisis, some money market participants did “hoard” liquidity and refuse to lend to other institutions because they were concerned that they might need the liquidity for themselves. This behavior led to a situation where liquidity was in short supply because all market participants expected it to be. 9 A central bank can help create conditions where market participants contribute to market liquidity because they believe that market will remain liquid.
Very early on, the National Bank realised that it could defend its autonomy and strengthen confidence in the Swiss franc by adopting rules of conduct. From the start, it strove to adhere to the rules of the gold standard and maintained this policy until the system of fixed exchange rates collapsed in 1973. With the Swiss franc losing its traditional anchor, the SNB was forced to adopt new rules. This was achieved 18 months later with the publication of annual growth targets for the money supply, a strategy which was pursued until 1999. Since 2000, our interest rate decisions have been based on our medium-term inflation forecast and our definition of price stability, which we consider achieved if annual inflation remains below 2%. The second constant in the National Bank’s activity over the past 100 years has been its adherence to the rules of monetary discipline. This strategy has allowed us, as it did our predecessors, to conduct a coherent monetary policy over all these years while shielding our institution from all kinds of demands, both economic and political. 2  BIS Review 71/2007  Willingness to adapt Given the strong disruptions in the international environment in the past 100 years, pursuing a policy of stability and applying the rules of monetary discipline has not been an easy undertaking. Let us not forget the obstacles we encountered in adhering to the rules of the gold standard and the fixed exchange rate system in times of war or during major international upheavals.