What does this uncertainty mean for the SNB? In the immediate term, the uncertainty above all pertains to the interpretation of the data currently available. In making our monetary policy decisions, it is important that we distinguish between temporary and sustained inflationary pressure. The recent rise in inflation may well have been triggered to a large extent by supply shocks with a temporary impact. However, given the difficulty in identifying an increase in sustained inflationary pressure in the current environment, there is the risk of underestimating the persistence of inflation. This is particularly the case because it is still very difficult to assess the impact of the highly expansionary monetary and fiscal policies worldwide in the wake of the pandemic and the war in Ukraine. The uncertainty is also reflected in the fact that our economic models may be capturing the current situation less reliably than usual. We have in fact had to repeatedly make upward revisions to our inflation forecast in recent quarters (cf. Chart 6). Models are inherently unable to anticipate either shocks – such as in the case of energy prices – or fundamental shifts in the behaviour of economic agents – such as pricing behaviour – and therefore only capture their impact with a certain time lag. It is very difficult at present to model companies’ pricing behaviour due to the lack of experience with rapidly rising inflation. A combination of newer and traditional approaches are helping us to get a better understanding of the current data.

To resolve this, fair-burden sharing will be necessary among leading economies and different regions. Structural Reforms Economic recovery will continue to be restrained unless countries speed up structural reforms. An effective way to improve long-term economic prospects is to address structural rigidities that weigh down the efficiency of labor markets. It must be recognized that demographic challenges such as the aging of the population add pressure on the labor market and public finances. Increased labor market participation and restructuring of benefit schemes are therefore needed. Authorities and labor market participants have to work together in this effort. Other structural rigidities in financial and product markets are of no less importance, and removing such obstacles is conducive to growth. Many economies are burdened with government deficits in the midst of the global economic slowdown. Automatic stabilizers have been allowed to operate in order to support growth. This may be prudent and appropriate; however, care should be taken that public finances do not become unsustainable. Policy makers are responsible for planning both for the short and the longer term and we encourage governments to consolidate their fiscal positions in order to enhance their nations’ competitiveness. The Fund should continue to monitor closely structural deficiencies and advise accordingly. Good Governance Economic integration has brought increased prosperity to those who have been part of the globalization process. Increased globalization also implies intensified competition in most areas. Good governance is, therefore, more important now than ever because it fosters confidence and growth, without entailing much additional economic cost.