Monetary policy conduct of the Swiss National Bank: the experience from 2001 to 2004

The economy of Switzerland experienced a slowdown and disinflation from 2001 to2003 and the Swiss National Bank (hereafter SNB) aggressively lowered its target range for the three-month Libor rate to the zero lower bound. Owing to the effects of monetary easing and the recovery of the global economy, disinflationary pressures had diminished in the end of 2003 and the SNB started to unwind its expansionary policy in the latter half of 2004. This paper investigates the monetary policy conduct of the SNB during this period and the accompanying financial market reactions, to derive implications for monetary policy conduct. Our main conclusions are twofold. First, estimation of the monetary policy reaction function suggests that the aggressive easing of the SNB from 2001 to 2003 was in line with optimal reaction in the presence of a zero bound on the nominal interest rate. Second, the policy actions taken by the SNB in the easing phase did affect the expectation of market participants on future economic development and monetary policy conducts, while those in the unwinding process of 2004 did not. This fact is consistent with the view that the SNB had taken enough time to have market participants sufficiently expect the near future interest rate hike prior to the actual unwinding process. Such prudent policy conduct was compatible with the robust control in monetary policy, because the SNB judged that the outcome of the low-probability risk of a return to disinflation would be the more serious concern than the possible adverse consequence of a rise in inflation.