for the central banks. for example, a credible and transparent central bank might indicate that, on the basis of its assessment of available economic data, it intends to embark on a gradual tightening or easing cycle. such a clearly stated policy intention could lead to changes in financial market prices – say long - term interest rates or the exchange rate – resulting in a change in the monetary policy stance without any formal change in the level of the official policy instrument. the idea here, as kohn and sack ( 2003, p 28 ) have stated, is that “ statements and policy actions can serve as effective substitutes for one another, at least in the short run. ” i would argue strongly that central bankers must not draw too much comfort from the notion that statements can substitute for policy actions beyond the very short run. as was pointed out by blinder, credibility is ultimately premised on " matching deeds to words ". if deeds systematically fail to match words, credibility will be at risk. transparency undoubtedly helps a central bank to conduct its monetary policy more efficiently and more effectively by rapidly transmitting its intentions to the market place and affecting a potentially wide ranging set of financial market prices. these monetary policy efficiency and effectiveness gains attributable to transparency have become broadly accepted by both practitioners and theoreticians. 7 nonetheless, ultimately, a central bank still has to do its job. a central bank should never signal an intention to do something if it does not intend to act accordingly. market participants would in due time recognise that the emperor has no clothes and alter their expectations in line with this recognition. if a credible central bank decides to use words with the explicit aim of substituting them for action, it will risk losing credibility and, with that, its ability to guide market expectations. this does not mean that central banks should always deliver what they have signalled in the past. central bank communication should simply reflect policy intentions based on the data and information available at the time of communication. naturally, as time progresses, new information will emerge, which may require a change in the assessment of the likely future monetary policy course. reviewing monetary policy based on new information is not the same as deliberately deceiving financial markets. in their interaction with a transparent and credible central bank, financial market participants accept the need for continuous re - evaluation of the likely future monetary policy path. indeed, markets expect such an update. moreover, market participants continuously review and update their own assessment of future economic and monetary policy developments. financial market prices therefore

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 fur 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. my point of departure will be the monetary policy instrument, which is typically a short - term interest rate. in light of the close links between monetary policy and financial markets, i will then explain the benefits of central bank transparency. my comments will end with a note of caution concerning the information value of financial market prices in a world of increasingly market oriented and transparent central banks. 1. how does monetary policy affect financial markets? monetary policy is aimed at preserving price stability. in some countries, central banks operate under mandates that refer to additional objectives such as full employment, maximum sustainable growth, stable interest rates or stable exchange rates. to meet their objectives, central banks intervene in financial markets. it is through the financial markets that monetary policy affects the real economy. in other words, financial markets are the connecting link in the transmission mechanism between monetary policy and the real economy. i will focus on the first part of the transmission mechanism only, i. e. the transmission from the monetary policy instrument to financial markets. monetary policy