This unit deals with the conduct of monetary policy, the core task of a central bank.
It focuses on the two main goals of a central bank (ensuring price stability while taking due account of economic developments), the most important monetary policy instrument (key interest rate), and the correlations between this instrument and both target variables (inflation and economic activity).
The highlight of the unit is Mopos, a web-based simulation centred around a simplified virtual economy.
In Mopos (derived from ‘monetary policy simulation’), students act as members of a central bank’s board and steer the monetary policy of a fictional country. This involves conducting a series of monetary policy assessments, each of which results in an interest rate decision (1 round = 1 quarter).
The simulation game can be played in pairs or in groups of three. For class, we recommend using the scenario mode, which offers a choice of four predefined scenarios. Each one includes a briefing that describes the initial situation and the task. Upon completion of a scenario, the simulation generates a debriefing and gives feedback. This is followed by a debriefing session with the whole class, based on the key questions posed in the briefing.
To open the Mopos simulation, go to mopos.iconomix.ch. Technical requirements are an internet connection and a widely used browser.
Two to four lessons
Focus subject economics and law
Intermediate to demanding
The ‘Monetary policy: Application’ unit consists of this commentary for teachers and the following teaching material:
Students are able to …
A modern central bank essentially pursues two goals: price stability as the primary objective and balanced economic development as an important secondary objective.
The central bank uses its
The central bank’s board makes interest rate decisions at regular intervals. For this purpose, it analyses the course of key economic variables, such as inflation (as an indicator of price stability) and the output gap (as a measure of economic performance), in the current quarter as well as previous quarters. In addition, it prepares forecasts on future developments in inflation and economic activity. These forecasts also depend on the applicable key interest rate, which influences both variables. Based on this comprehensive analysis, the central bank decides whether a monetary policy adjustment is necessary.
A number of factors complicate the conduct of monetary policy:
Four types of shocks come into play in Mopos. The effects of these is not limited to the short term, but can persist over several periods before disappearing again.
When forecasting inflation and economic activity, the most plausible assumptions possible are made with regard to the future development of shocks. As these assumptions are not usually accurate, the actual values may differ from those forecast.
The Mopos simulation is based on an economic model that reflects the overall dynamics of an economy. The model is depicted in a stylised manner, with many details of the real economy deliberately omitted. For instance, it does not address the interaction between various industries, differentiate between key interest rates and market interest rates, or include stock or real estate markets; not even the labour market is explicitly part of the model. By dispensing with such elements, however, the underlying dynamics of the economy become all the more apparent.
The data simulated in Mopos is based on real economic conditions, but does not relate to a particular country. The model is designed in such a way that, with prolonged play and repeated use, certain statistical patterns emerge, similar to those observed in the Swiss economy in the 1990s and 2000s, up until the financial crisis of 2007/2008.
The model also sets some restrictions when it comes to monetary policy. For example, unconventional monetary policy measures such as foreign exchange market interventions or negative interest rates are not included; only conventional interest rate steering is available.
Technical details on the model can be found in the ‘Model principles’ text (in German only) under ‘Extras’.
Mopos can be played in two game modes:
In random mode, Mopos starts with a randomly generated situation, making it difficult for teachers to monitor the process and give students clear exercises and targeted feedback.
For this reason, Mopos also offers a scenario mode, with a choice of four predefined scenarios. Each one includes a briefing that describes the initial situation and the task. Upon completion of a scenario, feedback is displayed directly in the simulation.
Important note: In scenario mode, the shocks – the economic drivers in the model – do not behave as they should according to model theory. Technically speaking, the shocks are not purely random and independent of each other (not ‘white noise’), but are time dependent (autocorrelated). This is a result of the way in which the scenarios were designed.
In the simulation, players adopt the role of members of the central bank’s board. This involves conducting a series of monetary policy assessments, each of which results in an interest rate decision (1 round = 1 quarter).
Each interest rate round consists of the following phases of the monetary policy decision-making process:
The simulation then jumps forward to the next quarter. The next interest rate round is approaching, during which the same two phases will be repeated.
In scenario mode, the effect of the shocks is demonstrated with a short animation. This change from previous versions of Mopos offers certain advantages from a learning perspective. Experience has shown that students often try to derive information from the shock time series that they are unable to provide. This distracted attention from the current situation and the new forecast, both of which are decisive for the next interest rate decision.
At the end of a scenario, the ‘Review of your term in office’ screen is displayed. The debriefing clearly summarises the term in office using charts and key figures. These show how well the monetary policy objectives – price stability and balanced economic development – have been achieved (fulfilment of mandate). In addition, the briefing for each scenario contains benchmark values that can be used as a reference for the evaluation (think ‘Taylor rule;’ for details, see the relevant briefing). The emoji feedback provides a visual evaluation based on the mandate criteria and benchmark values.
The ‘Review of your term in office’ screen can either be downloaded or shared by email.
In random mode, the impact of the individual shock types for the relevant quarter is represented by arrows. These indicate the direction of the shock (positive or negative) and its strength (neutral, medium, strong).
Once a minimum number of quarters have been played, the debriefing page can be accessed on demand (as an ‘interim analysis’). Unlike scenario mode, the simulation in random mode can be stopped and restarted at any time. However, no benchmark values or emoji feedback are available in this mode.
The liquidity trap occurs when interest rates reach their effective lower bound and monetary policy stimuli remain ineffective. What this means in Mopos is that the interest rate cannot be lowered any further, and other forms of monetary policy easing are also not available. Under these circumstances, real interest rates rise (due to deflation), which further slows the economy.
For various reasons, the economic model behind Mopos is far more likely to end up in this situation than a real economy. Should this occur, a sensible strategy would be to lower the key interest rate to zero early on, leave it there for a number of periods, and hope that the economy will recover on its own.
Additional countermeasures such as a substantial increase in government spending, a targeted weakening of the national currency (by selling the domestic currency against foreign currencies), quantitative easing of monetary policy (by purchasing securities in the domestic currency) or negative interest rates are not available in Mopos.
Once the model economy has become sufficiently stuck in the liquidity trap and no shock is large enough to free it from this situation, there is no way out. The only option is to end the simulation and start again.
The skills specified in the learning goals can be developed in the following two phases:
Phase 1: Introduction to topic and simulation
The Mopos simulation game is the main component of the first phase. We recommend starting with scenario mode and proceeding as follows:
There are four predefined scenarios to choose from in scenario mode.
In line with normal economic development. The mandate can be fulfilled without difficulty; hitting the benchmark can be challenging.
If interest rates are not raised quickly enough, there is a risk of inflation; if they are raised too quickly, the economy will slide into recession. The mandate can be fulfilled without difficulty; hitting the benchmark should be possible.
Multiple changes in interest rate policy necessary; timing is critical. Fulfilling the mandate is challenging; hitting the benchmark is very difficult.
Students have to choose between returning to price stability or combating deep recession. The mandate cannot be fulfilled; hitting the benchmark is challenging.
Phase 2: Debriefing and reflection
Upon completion of the simulation, the students write an accountability report on their term in office, addressed to ‘parliament’, i.e. the class. This report can be based on the following key questions (cf. briefing texts):
The second phase concludes with students studying the advanced text in class or as homework. This helps deepen their understanding of the core economic concept behind monetary policy and explains the most important technical terms again in detail.
An action-oriented simulation such as Mopos is especially effective when students evaluate their decisions, processes and results subjectively using specific key questions and place them in a broader context.
Reflecting in this way on the proposed key questions promotes higher-level skills such as critical thinking, problem-solving and linking theory and practice. It helps students gain a deep understanding of economic relationships and develop well-founded arguments independently – key skills for effective learning and comprehensive understanding.
For a review of monetary policy concepts and mechanisms, as well as their relevance for the SNB’s monetary policy practice, please refer to the ‘Basic knowledge’ worksheet from the related ‘Monetary policy: Fundamentals’ unit.
| Steps | Description | Media/material | Time | |
|---|---|---|---|---|
| Phase 1 45 minutes | Start | Introduction to concept behind Mopos using slide set Short demo of Mopos up to ‘Task’ screen after scenario selection | ‘Introduction to Mopos: Scenario mode’ slides; Laptop or tablet and projector | 15 minutes |
| Simulation | Transition to pair or group work based on briefing texts for scenarios | Mopos Briefing texts Laptop or tablet | 30 minutes | |
| Phase 2 90 minutes | Debriefing and reflection | Preparation of presentation based on key questions from briefing, individually or in pairs | Briefing texts | 45 minutes (Alternatively: Outside of class) |
| Presentation and discussion in class | Projector or visualiser | 45 minutes | ||
| Theory input | Study advanced text (possibly as homework) | Advanced text | Recommendation: Outside of class |
