More (and more highly specialised) workers, better and more broadly invested capital and a rapid exchange of knowledge – all this led to higher economic growth and greater prosperity worldwide. Globalisation also had a major impact on monetary policy. The most important change in this respect was the increasingly global production of goods, which reduced inflationary pressure. The latter also fell because the global economy was able to satisfy increases in demand in individual countries comparatively easily. In the less integrated economy of the Cold War era, higher demand quickly led to bottlenecks and rising prices. With inflationary pressure lower, central banks were able to react more strongly to adverse economic developments. And this was often appropriate, in retrospect. For the global integration of the financial markets did not just foster growth, it also made it easier for local crises to spread to other countries. In the past 15 years, there have been repeated instances where such global crises have prompted the major central banks to substantially ease their monetary policies to prevent severe economic declines and persistently negative inflation rates. This easing was initially achieved through interest rate reductions, but then increasingly by means of unconventional measures such as quantitative easing and, in the case of Switzerland, foreign exchange market interventions. The expansion in the range of monetary policy instruments also has to do with globalisation. The traditional way to ease monetary policy is by lowering the policy rate below its neutral level.

The financial soundness of a central bank, the usual lender of last resort in a country, is an important firewall for trouble in the financial system. While a central bank may count with the help of the sovereign, this channel may be a source of concern when sovereign themselves are facing problems, and it also raises some worries about the ability of the central bank to maintain its independence. There are also those who argue that, since the liabilities of central banks can be arbitrarily created, the financial position of a central bank shouldn’t matter. But this argument forgets that doing so may endanger the achievement of the inflation targets that many central banks have taken as their operational goals, affecting their reputation and independence. 2  4  Céspedes et al. 2012. BIS central bankers’ speeches  In 1982, as the debt crisis spread through Latin America, the Chilean financial system, which had channeled substantial foreign-currency-denominated syndicated loans, became largely insolvent. Under these conditions, the government engineered a massive rescue operation through the central bank where several of the most important banks became nationalized and others disappeared, after their assets were absorbed by other institutions. This intervention prevented an even larger collapse of activity than the one we ended up experiencing. The manner in which it was implemented, where shareholder equity was fully diluted and institutions assumed a subordinated debt to the central bank that took a long time to repay, helped maintain the rescue’s moral hazard concerns at bay.