dr. duisenberg discusses strategies for monetary policy in emu address by dr. w. f. duisenberg, president of the netherlands bank and of the bank for international settlements, on the occasion of the board meeting of the banking federation of the european union held in maastricht on 20 - 21 / 3 / 97. it is with great pleasure that i am addressing you on the european economic and monetary union here in maastricht today, the very location where that union was pieced together. it was here that we made a concerted effort some five years ago to lay the foundations for the economic and monetary stability of europe in the 21st century. since then we have been busily building on these foundations with the result that we now have the outlines of the european central bank. the framework for monetary policy contains three main elements : its primary objective, strategy and instruments. where the first is concerned, there can be no misunderstanding : the maastricht treaty prescribes that the overriding objective of ecb policy shall be price stability. knowing you all to be distinguished financial and monetary experts, i need hardly point out to you that to attain this objective, strategy must be transparent and credible. it is not for nothing that in recent months this issue has been figuring prominently on the agenda of the european monetary institute, the precursor of the ecb. let me give you a brief impression of the consultations held there. as soon as it has been decided in early 1998 which countries are to take part in emu, the ecb will decide what monetary strategy to pursue. generally speaking, there are two aspects to such a strategy : internal decision - making within the central bank and, equally important, the presentation of its measures to the outside world. in fact both aspects hinge on the question which variables should underlie the central banks interest rate policy and what weight should be assigned to each of these variables. after all, monetary policy is complicated by the fact that inflation reacts to the central bank ’ s interest rate decisions with long and varied lags. actual inflation rates are therefore not cut out to be a gauge of monetary conditions. the central bank should focus on information which provides insight into future inflation, and possibly formulate a number of intermediate objectives, the so - termed intermediate target variables : in europe today the money supply and the exchange rate often figure as such. the exchange rate in particular plays a major role in open economies, where inflation is due largely to external

seek to achieve a specific value between 0 % and 2 %. furthermore, the snb focuses on the medium - term inflation outlook, which means that negative inflation or inflation rates in excess of 2 % can also be temporarily permitted. in recent years, there has been intense debate in academic circles and also at central banks on how to best set inflation targets or define price stability. some central banks have also adjusted their inflation targets. these adjustments have been primarily aimed at reducing potential constraints on the ability to take monetary policy action resulting from the low interest rate environment. would adjusting the definition of price stability also make sense for the snb? we are firmly convinced that our definition of price stability has proved its worth, even under the difficult circumstances of the past 15 years. we also regard our definition as a particular advantage in the post - pandemic phase, with its heightened uncertainty regarding structural equilibria. why is this so? and how can three adjustments that have been discussed internationally be put in context against the backdrop of the specific situation in switzerland and our definition of price stability? the first possible adjustment relates to the level of the inflation target. a credible higher inflation target would lead to both an increase in expected and realised inflation. the consequence would be higher average nominal interest rates, which would reduce the likelihood of the effective lower bound being reached. as a result, unconventional measures – page 7 / 16 in our case primarily foreign exchange market interventions – would need to be used less frequently. why do we not aim for a higher rate of inflation? we do not believe a higher inflation target would truly free us from the problem of the effective lower bound. it would take a significantly higher inflation target to sustainably lift interest rates from the lower bound. however, such a target would no longer be compatible with our statutory mandate to ensure price stability. furthermore, it would not tally with the pronounced preference of the swiss people for low inflation. higher rates of inflation would be neither understood nor accepted in switzerland. a survey of more than 400 swiss companies in the first half of 2022 showed a large majority in favour of low inflation, by which they typically mean a rate between 0 % and 2 % ( cf. chart 8 ). we do not have similar surveys of households, but it is safe to assume that they would likely favour even lower inflation. the public reaction to the recent rise in inflation clearly demonstrates that there would be little understanding among the general population for a higher targeted rate of inflation. a second possible