There could still be a number of setbacks; we have already witnessed periods of apparent improvements in recent months, only to see the crisis return in full force. Thus it is still difficult, at this point of time, to draw conclusive lessons for the future. 2. Objectives and instruments of monetary policy  Before I delve into the subject of the financial market crisis, let me begin by reminding you of the objectives and instruments of monetary policy. These will be important things to keep in mind later on. The objectives of monetary policy can be neatly summarised as stability, stability and stability. To be more precise – the objectives of monetary policy are price stability, economic stability, and financial stability. We can order these three stability objectives according to the time lag between the specific monetary policy action and the effects of that action on the particular objective. The longest lag between action and reaction is to be found in the transmission of monetary policy to prices. Thus, monetary policy should aim at price stability in the long run. Under long run, I understand a horizon of up to a number of years. In the medium term, with a horizon of one to two years, monetary policy can be used for smoothing economic cycles. And in the short run, immediate action may sometimes be required to safeguard the stability of the financial system. We can also order the three stability objectives according to the degree to which monetary policy is responsible for the eventual outcome.

In an internationally coordinated effort, longerterm operations of this kind were intensified in December, in order to meet heightened demand surrounding year-end pressure. In December, the SNB conducted several repo transactions with maturities between three and four weeks to cover year-end requirements. In March, there were three auctions of three-month Swiss franc repos. A consequence of tensions in the money markets was an inefficient distribution of liquidity. While some institutions tended to hoard liquidity, other institutions found it hard to come by. Some central banks therefore enlarged the range of counterparties for their liquidity management operations. A good example of this is the Term Auction Facility (TAF) introduced by the Federal Reserve in December, which provides 28-day term loans. This facility functions essentially like an open market auction, but is open to depository institutions, while access to the Fed’s regular open market operations is restricted to 20 primary dealers. Furthermore, some central banks broadened the range of eligible collateral for their operations. This allowed the banks to keep their best collateral for the money market. Another problem during the crisis was the dollar liquidity shortage of European banks. This resulted in additional uncertainty and in a high intraday volatility of dollar rates. In an internationally coordinated effort, the Federal Reserve therefore, in December, established a US dollar swap line for the ECB and the SNB. On December 17, the SNB, for the first time ever, conducted a repo auction in foreign currency and provided four billion US dollars of liquidity for 28 days to its counterparties.