. ( 2002 ) : ‘ monetary policy and real stabilization ’, mimeo. princeton university • the direct exchange rate channel to inflation an appreciation will reduce prices for imported goods measured in krone terms. how quickly this reduction will feed through to consumer prices depends among other things on competitive conditions and margin setting. a change in the real interest rate will also influence demand in the economy. • the real interest rate channel to aggregate demand • an increase in the real interest rate reduces demand, both for consumer and investment goods. it becomes relatively more attractive to save, and leads to a reduction in current consumption. investors in their turn will face higher investment costs and will as a result reduce investment demand. • the exchange rate channel to aggregate demand strengthening the exchange rate means that domestically produced goods and services become relatively more expensive than competing foreign products. demand for domestically produced goods is thus reduced. it is common to assume that the effects through the channels mentioned so far will come about within one year of a change in the interest rate. the direct exchange rate channel to inflation is probably the one that acts quickest. • the demand channel to inflation the reduction in aggregate demand as a result of the rise in the interest rate will in turn slow the rise in prices. this is mainly due to two factors. first, output is reduced. the decline in output results in lower demand for labour. this reduces wage growth. second, firms set lower prices as a result of lower demand. the impact on inflation is often assumed to come one to two years after the effect on aggregate demand. in addition to these relatively direct effects, the price level will also be influenced by changes in prices for imported and domestically produced intermediate goods. • the expectations channel to inflation both price and wage inflation is affected by changes in expected inflation. one reason is that firms often set prices for several periods. the same applies to wage formation. expected price changes will figure prominently in the calculation of expected future real wages. we have seen that an increase in the nominal rate of interest reduces inflation through various channels with varying lags. as a result, inflation expectations can also be expected to be redused. the expectation channel will therefore amplify the effect of monetary policy. the time it takes for a change in the interest rate to have an impact on inflation and demand will vary. it must also be stressed that in the course of the period in which a change in the interest rate affects output and inflation - and often before monetary policy takes effect - the economy

thomas jordan : the swiss national bank ’ s monetary policy in turbulent times summary of a speech by mr thomas jordan, member of the governing board of the swiss national bank, at the geldmarkt - apero of the swiss national bank, zurich, 19 march 2009. the complete speech can be found in german on the swiss national bank ’ s website ( www. snb. ch ). * * * the financial market crisis has now widened into a global economic recession, and the swiss economy is feeling the full impact. the snb has taken prompt and decisive action in response, and substantially relaxed its monetary policy. in mid - march, as a result of the sharp economic downturn since december 2008, a further major expansion of monetary policy became necessary. however, the snb was already operating a de facto zero interest rate policy ( zirp ), and the natural limits of conventional monetary policy had been reached. the snb therefore took three unconventional measures : increasing the number of transactions in repos with longer terms, purchasing swiss franc bonds issued by private sector borrowers, and buying foreign currency on the open market. in implementing these unconventional steps, the snb has demonstrated that, even in an environment of zero interest rates, it still has a number of tools at its disposal which allow it to react flexibly to any undesired tightening of monetary conditions. in this context, it is important not to misinterpret the foreign currency measures as the start of a “ beggar thy neighbour ” policy. in periods of zero interest rates, such purchases help to counter the risk of deflation. the swiss economy faces an exceptionally difficult year in 2009. economic activity is set to pick up again gradually over the course of 2010, thanks to the extremely expansive monetary policy. this is, however, conditional upon an economic recovery by our main trading partners, as well as a return to stability on financial markets. the snb measures are also aimed at reducing the risk of deflation in switzerland. despite the creation of massive amounts of liquidity, the snb remains committed to ensuring price stability in the future. we will use all means at our disposal to reduce liquidity again in good time, so as to prevent any upsurge of inflation in switzerland once the crisis has ended.