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.

Between early 2015 and autumn 2022, the monetary policy of the Swiss National Bank (SNB) was based on two key elements: the negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary. Both were unconventional monetary policy measures, and given the situation at the time, both were 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 updated unit on monetary policy launched at the end of 2022, 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  Furthermore, there were some weaknesses in MOPOS regarding design and user guidance. For example, the "score" at the end of a "game round" had to be gathered and calculated outside the app.

The Iconomix team, together with SNB experts, gave a great deal of thought 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.2 As it turned out, however, such a model does not exist. 

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, 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.

[1] Schweizer Zinssätze: Ein Überblick von 1852 bis 2020 | Die Volkswirtschaft - Plattform für Wirtschaftspolitik (in German and French only).

[2] For the knowledge sheet on the model behind the browser simulation MOPOS, see here (in German only).

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.

Portrait von Manuel Wälti
Article from:
Manuel Wälti
created on 07.06.2022
modified on 17.01.2023

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