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

policy ’ s room for manoeuvre would be unimpaired. in the most recent financial and economic crisis, fiscal policy in switzerland has primarily relied on the effects of automatic stabilisers, and has been sparing in its use of discretionary stabilisation measures. nevertheless, in view of the severity of the crisis, the federal council initiated targeted discretionary measures, in line with the debt brake requirements. however, as mentioned, the debt brake also allows for exceptions in certain unusual circumstances. this exceptions rule made it possible to provide ubs with temporary support in 2008, without jeopardising the confederation ’ s ability to fulfil its normal mandate. 12 there is another reason for restraint in discretionary fiscal policy. the impact of a government economic stimulus programme in a small open economy such as switzerland is slight. the high proportion of imports means that much of the government spending dissipates abroad. it has been empirically demonstrated that the fiscal multiplier in small open economies is zero or even negative. 13 the impact is further reduced if the shock does not originate in the domestic economy, but from outside – as was the case in the most recent crisis. the crisis has confirmed the limits of discretionary fiscal policy stabilisation. for example, the measures adopted by the confederation in 2009 and 2010 could not be implemented fully and in a targeted way. 14 swiss monetary policy has also made an important contribution to economic stability. it is also subject to binding rules. for example, the requirement to ensure price stability is enshrined in the national bank act and is defined in the snb ’ s monetary policy strategy, which has been in force since 2000 ( cf. chart 8 ). 15 the snb equates price stability with a rise in the national consumer price index of less than 2 % a year. moreover, the snb ’ s independence is enshrined in the federal constitution. this requires it to operate without political pressure. as a counterweight to this independence, the snb has a duty of accountability ; it must report regularly to the government and the general public on monetary policy matters. thus, monetary policy is also equipped with good rules, and this is reflected in a high degree of stability. by international standards, switzerland has very low inflation rates and low interest rates. during the most recent crisis, the monetary policy authorities cut interest rates sharply and rapidly, and expanded the supply of liquidity. in response to the strong and