fritz zurbrugg : fiscal and monetary policy – interdependence and possible sources of tension speech by mr fritz zurbrugg, member of the governing board of the swiss national bank, at the university of lucerne, lucerne, 21 november 2012. * * * ladies and gentlemen, it is a great pleasure for me to be giving this presentation at the university of lucerne this evening. tonight ’ s topic is one that has interested me for some time. during my ten years at the international monetary fund, i repeatedly dealt with questions of fiscal and monetary policy and the interplay between them – albeit in a general and rather abstract way. over the past six years at the federal finance administration, my work was focused on fiscal policy, and in particular its implementation. this summer, i transferred to the governing board of the swiss national bank ( snb ), and now have the unique opportunity, and the privilege, to focus on monetary policy. although it is probably a little early for me to be making definitive speeches on both of these economic policy areas, i would like to share a few initial thoughts with you. introduction in some countries, the scope for fiscal policy action has recently come up against its limits. governments today find themselves in the position of being virtually unable to finance their normal range of activities, meaning that there is also no scope left for discretionary economic stimulus measures. this has raised expectations on monetary policy to do something to stabilise the economy and the financial markets. and indeed, central banks across the world have introduced unconventional measures, in order to fulfil their mandates even under these unusual circumstances. some of these measures have come in for criticism, because they encroach on the territory of fiscal policy. thus, there is currently tension between monetary and fiscal policy in a number of countries. how does this tension come about? which factors might exacerbate or mitigate it? and what is the current situation in switzerland? to address these questions, i will first review the goals and the division of responsibilities in these two areas of economic policy. in a second step, using the recent crisis as an example, i will highlight the importance of rules and a culture of stability for an economic policy that is both sustainable and tension - free. i will finish by describing the current situation in switzerland. fiscal and monetary policy goals and complementarity must there necessarily be tension between monetary and fiscal policy? this might be true if these two areas of economic

the snb will also need this flexibility to reduce the balance sheet again, if necessary. the demands of the initiative would considerably curtail this flexibility. were the initiative to be accepted, the snb would – in the current environment – have to make large - scale gold purchases to meet the required 20 % minimum share of gold. it would not be allowed to sell this gold at a later point, even if it had to reduce its balance sheet again in order to maintain price stability. in a worst - case scenario, the assets side of the snb ’ s balance sheet would, over time, be largely comprised of unsellable gold. managing the interest rate level and the money supply would only be possible via the liabilities side of the balance sheet ; in practice by issuing the snb ’ s own interest - bearing debt certificates ( snb bills ). this would have serious financial consequences : on the assets side, the snb would neither have any interest income nor could it realise any profits on gold due to the ban on sales. on the liabilities side, it might have to pay high interest on debt certificates. the snb bis central bankers ’ speeches could therefore find itself in a situation in which it could only finance its current expenses by means of money creation. the far - reaching demands of the gold initiative would inevitably have repercussions for our monetary policy. in making its monetary policy decisions, the snb would have to consider the long - term consequences the necessary gold purchases would have on its capacity to act and on the structure of its balance sheet. furthermore, market participants would hardly regard monetary policy decisions as credible, should these decisions involve a substantial expansion of the balance sheet, which in turn would impair the effect of monetary policy. it is unlikely that decisions such as the introduction of the minimum exchange rate or the stabilisation of ubs would have been made in the same way given these circumstances. this constraint on the capacity to act would not be in switzerland ’ s interest. gold is nevertheless an important component of the snb ’ s assets. however, this is not because gold guarantees price stability. in today ’ s monetary system, there is no direct connection between the proportion of gold on the snb ’ s balance sheet and price stability. this is also evidenced by the fact that the objective of price stability has been better achieved in recent years, even though the proportion of gold on our balance sheet was smaller, than at times when gold accounted for a much