tries to picture a shock, eg a massive rise in oil prices. the immediate consequence will be an increase in the price level and a fall in production. this constellation confronts the central bank with a trade - off between price stability and growth. if the bank ’ s sole concern is a quick restoration of price stability, it will raise interest rates and consequently exacerbate the loss of output. if, on the contrary, it reacts solely to the production effect, it will strengthen the shock - induced deviation from the goal of price stability by lowering interest rates. reacting to shocks may lead to a trade - off between the variability of output and the variability of the price level ( king 1999, p 12 ). this trade - off in itself is an extremely complex phenomenon. it is determined by the structure of the economic process and the dynamics of expectations. there is, realistically speaking, no chance to deduce a general policy rule and to formally embody such a rule in the central bank mandate. any decision to correct slowly and gradually or in a single bold effort any deviation from price stability, whatever its origin, can only be taken individually. monetary history has successful examples to show for both patterns of reaction, but also unfortunate episodes in which central banks actually increased the variability of the price level and of output through activist manoeuvres. it would thus appear reasonable that an addendum, unspecified as to substance, should be made to the mandate of ensuring price stability. for example, to the effect that in fulfilling the mandate due attention should be paid to the development of economic activity. art. 99 of the swiss federal constitution obliges the snb to conduct a monetary policy which serves the general interests of the country. endeavours are under way to spell out this vague formulation in more detail in the forthcoming comprehensive revision of the national bank law. when revising our monetary policy concept, we took a step in this direction by quantifying the stability target ( cpi inflation below 2 % ) and undertaking to adhere to the target in the medium term. transparency a further aim was to continue to improve transparency. it is a fact that the call for more transparency has sounded far and wide. this call is more than merely a short - lived fashion. there are two especially valid reasons for the formerly rather reserved central banks to communicate openly and in good time. for one thing, transparency - in particular, ex post transparency - is an indispensable precondition for accountability and thus

its attractiveness because its central analytical basis was subject to successive erosion. money demand functions became increasingly unstable. given some differences between countries on the one hand and the aggregates employed on the other hand - mainly m0 to m3 - the connection between the intermediate target and the ultimate target became more and more unreliable. that was also the case in switzerland, even if with a time - lag and to a lesser extent than in other countries, notably english - speaking ones. we recorded shifts in cash holdings which we could not even explain satisfactorily ex post, much less have forecast them with any degree of accuracy. the central banks reacted differently to this experience. some rapidly threw money supply targeting overboard. others - including the snb - changed from annual to medium - term targets. the extended room for manoeuvre made it possible to consider various indicators in shaping the policy course. one could use the term pragmatically adapted targeting of the money supply. in actual fact, this step came close to a transformation of the money stock from an intermediate target to a monetary indicator, albeit the most important one. the destabilisation of money demand as previously set out has complex reasons on various levels. regulatory changes, adjustments in the structure of banks, and innovations in the fields of investment opportunities and payments undoubtedly play a major role. moreover, with receding inflation rates the relative disruptive effect of such instabilities has increased. certainly, it cannot be excluded that at some point in the future we will again see a phase of greater stability in the demand for money, but in the current environment such a change is not evident. the policy concept implemented by the swiss national bank three months ago is made up of the following three elements : an explicit definition - in terms of a figure - of price stability ; publication of a three - year inflation forecast ; and an operational implementation target in the form of a target range consisting of 100 basis points for the three - month swiss franc / libor rate. i need not enter into this in detail before this audience. the decisive test must be in the time path of the ultimate target variable - the price level - which we will achieve on this basis. as regards the concept as such, i should merely like to make two remarks pertaining to misunderstandings. first, the interest rate target defined as a target range is not a substitute for the money supply target of the concept formerly implemented by us. it is neither more nor less than an operational