Monetary policy unit: Knowledge sheet replaces MOPOS

Extraordinary times call for extraordinary measures: In the aftermath of the 2007/2008 financial crisis, monetary policy changed substantially – not just in Switzerland but worldwide. How can the functioning of today’s monetary policy be described in a way that captures these changes? A new Iconomix knowledge sheet provides an answer.

Since 2015, the monetary policy of the Swiss National Bank (SNB) has been based on two key elements: the negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary. Both are unconventional monetary policy measures, and in the current situation both are essential to ensure price stability.

However, it is not so easy to explain why this policy change was necessary and what steps led up to it. In its recently updated unit on monetary policy, Iconomix first sets out the basic mechanisms of conventional monetary policy before expanding on today’s unconventional monetary policy. The new knowledge sheet replaces the MOPOS simulation tool, which was in use for 14 years.

Those who are familiar with Iconomix may wonder why this popular and action-oriented tool is replaced by a seemingly simple knowledge sheet. The reason is that MOPOS had a number of shortcomings.

Why MOPOS was discontinued

First, the economic model behind MOPOS was calibrated to Switzerland’s situation in the 1990s, when the nominal interest rate for Swiss franc bonds with maturities of five years or longer ranged from 2.7% to 6.8%.1 As was common at the time, the lower bound for the interest rate was implemented at exactly 0% in the model, with MOPOS yielding unsatisfactory results close to the lower bound (liquidity trap).

Second, MOPOS depicted a world based entirely on the steering of interest rates. There was no place for unconventional monetary policy instruments such as negative interest rates or foreign exchange market interventions. In addition, there were some inherent problems with the scenarios implemented in MOPOS (e.g. the ‘calm waters’ or ‘threat of deflation’ scenarios). Due to the design of these scenarios, the shocks driving the stochastic model (the ‘innovations’) were not independent from each other, yet theoretically they should have been. Systematic forecasting errors occurred as a result.

The Iconomix team, together with SNB experts, gave a great deal of thought to whether and how MOPOS could nevertheless be retained. What we were looking for was a modern macroeconomic model that was just as transparent and simple didactically as the New Keynesian model behind MOPOS. As it turned out, however, such a model does not exist, nor will it exist for a long time yet.

The advantages of the new knowledge sheet

Therefore, it seemed to be more honest to abandon the action-oriented simulation approach altogether and introduce a knowledge sheet that explains the basic mechanism of monetary policy in a readily understandable and illustrative manner, including diagrams and charts, and then expands on how today’s unconventional monetary policy works.

Students can apply the theory presented in the knowledge sheet in a didactic worksheet that contains various levels. For those wishing to delve further into the subject, six source texts – studies, speeches and excerpts from SNB publications – are provided together with a brief introduction that puts them into context.

The monetary policy unit was updated at the beginning of June 2022 (the German version was published in November 2021). For the time being, the discontinued MOPOS browser simulation is still available on request. However, Iconomix no longer recommends its use in the classroom for the above reasons. We hope that the many MOPOS fans will understand the considerations behind its discontinuation and will recognise the advantages of the new approach. 

Monetary policy unit

The six-page knowledge sheet explains the basic mechanism of monetary policy, the decision-making process behind it, and today’s unconventional monetary policy.

Manuel Wälti
Article from:
Manuel Wälti
created on 07.06.2022
modified at 07.06.2022