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.
The SNB now implements its monetary policy by steering the interest rate level on the money market. It sets the SNB policy rate and seeks to keep the secured short-term money market rates close to this rate. If necessary, the SNB may also use what are known as ‘additional’ monetary policy measures to influence the exchange rate or the interest rate level. In earlier periods, it also set a minimum exchange rate against the euro (2011–2015) and set negative interest rates (2015–2022).
This is a very different kind of monetary policy compared to the period prior to the financial crisis of 2007/2008. However, it is not so easy to explain why this policy change was necessary and what steps led up to it. In the monetary policy unit updated at the end of 2022, Iconomix first sets out the basic mechanisms of conventional monetary policy before expanding on today’s still unconventional monetary policy. The new advanced text 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 was replaced by a conventional advanced text. The reason is that MOPOS had a number of shortcomings.
Why MOPOS was discontinued
MOPOS was based on a macroeconomic model from 19991 that 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%.2 Back then, policy was implemented exclusively by steering interest rates. Accordingly, the lower bound on interest rates was set at exactly 0% in the model, with MOPOS yielding unsatisfactory results close to the lower bound (liquidity trap).
The Iconomix team, together with SNB experts, gave a great deal of thought as to how MOPOS could be expanded to include unconventional monetary policy instruments. 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.
The advantages of the new advanced text
Interest rates in Switzerland are now back in positive territory. Nevertheless, the monetary policy situation remains fundamentally different from that before the 2007/2008 global financial crisis. The current situation is characterised by a structural liquidity surplus in the banking system, which is why the implementation of monetary policy, even after a return to positive interest rates, still functions completely differently compared to before the financial crisis. Furthermore, the SNB continues to influence the exchange rate and the interest rate level with additional monetary policy measures.
MOPOS is thus from an era that has long since passed. Until we have a better alternative, we have decided it is time to say goodbye to MOPOS. Instead, an easy-to-understand and descriptive advanced text with diagrams and charts illustrates the basic mechanism of monetary policy, before expanding on how today’s unconventional monetary policy works. Students can apply the theory presented in the advanced text in a didactic worksheet that contains various levels.
For those wishing to delve further into the subject, seven 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 relaunched at the beginning of June 2022 (the German version was published in November 2021). 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. We are grateful for feedback and reactions.
Would you like to give us some spontaneous feedback? We appreciate any kind of input.