If markets can better anticipate the behaviour of a central bank and the effects of monetary policy, there should be less scope for monetary policy surprises, better anchored inflation expectations, less monetary policy-induced volatility in asset prices and ultimately less macroeconomic volatility. Less volatility should translate into a lower risk premium and may thus promote investment and positively affect economic growth. Lower risk premiums also lead to higher asset prices. Indeed, throughout the world and for most asset classes, there seems to be a trend in recent years to higher valuations. These higher valuations can probably partly be attributed to the reduction of the risk premium due to lower expected volatility. To the extent that market participants correctly gauge a reduction in the risk premium, higher asset valuations can be expected to endure and represent lasting wealth creation. There is a third reason why central bank transparency has become pertinent. With the world's capital stock growing faster than the world's economies, real effects attributable to asset prices are becoming more important. 4 On the one hand, this is good news, as it creates wealth and strengthens the transmission process of monetary policy. On the other hand, a sudden increase in asset price volatility could have more adverse consequences for the real economy than what we might infer from past experience. If that is so, central banks clearly have an incentive to avoid becoming the source of unnecessary asset price volatility.

Philipp Hildebrand: Monetary policy and financial markets Speech by Mr Philipp Hildebrand, Member of the Governing Board of the Swiss National Bank, at the Schweizerische Gesellschaft für Finanzmarktforschung, Zurich, 7 April 2006. References to the speech can be found on the Swiss National Bank’s website. *  *  *  Introduction Today marks the twentieth anniversary of the Swiss Society for Financial Market Research. I am honored to be able to address you on this occasion. As a central banker and as a former market participant, it is a special privilege to talk to you about how monetary policy and financial markets relate to each other. But before I begin, let me extend my congratulations and best wishes. I trust that the efforts of the society will continue to foster our understanding of financial markets for many years to come. Monetary policy and financial markets are intrinsically linked. Central banks conduct monetary policy by directly and indirectly influencing financial market prices. Since financial market participants seek to extract profits from buying and selling securities, markets inevitably pay close attention to both words and deeds of central banks. The relationship between monetary policy and financial markets is by no means a one way street, however. Financial market prices reflect the expectations of market participants about future economic and monetary developments. These expectations, in turn, provide valuable information for central banks in determining the optimal future course of monetary policy. In today’s remarks, I will begin by discussing how monetary policy influences various financial market prices.