In the Mopos simulation, you adopt the role of a member of a central bank’ board. A central bank is no ordinary bank; it is charged with the fulfilment of a specific task, namely to conduct a monetary policy that serves the overall interests of the country. You will learn what this means in this briefing.
This briefing serves as a guide and will take you through all phases of the simulation. It describes the task and preparatory steps, provides an overview of the initial situation, and, after the simulation, helps you to analyse and reflect on your decisions in the debriefing.
Conduct the monetary policy of a fictional country for the next five years (20 quarters). Ensure that prices remain stable (inflation between 0% and 2%) without the overall economy overheating or cooling significantly (output gap between –1% and 1%).
For particularly delicate or important interest rate decisions, note down the reasons: Why did you, on the board of the central bank, adjust the key interest rate, and why by this amount? You don’t need to note anything else, the simulation records all other data in the background, including the impact of your decisions on inflation and economic activity.
Start Mopos using the following link: mopos.iconomix.ch. The welcome page opens. Click ‘Next’.
On the next screen, the scenario mode can be selected. Select the ‘Stagflation’ scenario; it allows you to put your monetary policy skills to the test in a preset scenario. Click ‘Next’.
The next screen will ask you to enter your name or the name of your group. After doing so, click ‘Next’.
This screen briefly describes the initial situation. Click on ‘Start term in office’ to load the simulation.
Inflation over the last few quarters has risen significantly and is currently at around 5%. Meanwhile, the ‘output gap’ indicator, which stands at –1.74% in the current quarter, is pointing to a recession. You are faced with a dilemma: If you try to restore price stability as soon as possible, you will deepen or prolong the recession at the same time. Weigh up the pros and cons, and try to come up with a reasonable compromise.
At the end of each scenario, Mopos provides a debriefing of your term in office, with time series charts for the nominal interest rate, inflation and output gap, as well as the additional information listed below.
The goal – ‘ensure stable prices without the overall economy overheating or cooling significantly’ – can be expressed in terms of four key figures:
| Average inflation | The average rate of inflation achieved across all quarters |
| Average output gap | The average output gap measured across all quarters. |
| Standard deviation of inflation rate | This measures whether the inflation target has been steady (low standard deviation) or fluctuating strongly (high standard deviation). A low value means a better result. |
| Standard deviation of output gap | As above, but for the output gap target. |
Table 1: Key figures on fulfilment of mandate
Table 2 provides benchmark values (i.e. reference values) for assessing your monetary policy performance in the ‘Stagflation’ scenario. These values were determined via ‘automatic pilot’, which steered monetary policy according to the Taylor rule. This rule defines how a central bank should respond to changes in inflation and economic activity. The text box below explains how it works.
| Average inflation | 3.05% |
| Average output gap | –1.67% |
| Standard deviation of inflation rate | 1.56% |
| Standard deviation of output gap | 0.99% |
Table 2: Benchmark values for ‘Stagflation’ scenario after 20 quarters based on Taylor rule
The Taylor rule is a simple but widely used rule for the systematic steering of monetary policy. It describes how central banks should adjust key interest rates if inflation or economic activity deviate from the target path.
In Mopos, the rule is implemented as follows: If inflation exceeds the long-term target of 2%, the central bank should raise the key interest rate by 1.5 percentage points for each percentage point of inflation. If actual output is above long-term potential, there is a danger that the economy will overheat and inflationary pressure will emerge. In this case, the rule recommends raising the key interest rate by 0.5 percentage points for each percentage point by which output exceeds potential.
Use of the Taylor rule often leads to a volatile (i.e. fluctuating) interest rate path. It is therefore common practice to smooth the interest rate somewhat. Mopos takes this into account with a smoothing coefficient of 0.2. This means that only 80% of the interest rate increase prescribed by the Taylor rule is implemented in each period.
The emoji feedback provides a visual evaluation based on the mandate criteria and benchmark values (cf. section above). Since the monetary policy mandate cannot be fully met in all scenarios, the emoji feedback is based on benchmark values in such cases. This enables an objective and transparent evaluation of your term in office in all circumstances.
Very good
Good
Satisfactory
Unsatisfactory
At the end of your term on the board of the central bank, you must present a report on your term in office to ‘parliament’ (your class). You can refer back to the ‘Review of your term in office’ screen (‘debriefing’ for short), which can either be downloaded or shared by email, as well as your notes and the following key questions:
Your presentation should take about 3–5 minutes. Use the five key questions listed above as reference. If you want to, you can include the optional sixth key question as well.
Start with a brief introduction describing your approach or strategy. The main part of your presentation should address the key questions, and the conclusion should summarise your findings.
Use the ‘Review of your term in office’ screen from the simulation as an aid.
Try to present in a clear and understandable way and to focus on the essential points.
