Stefan Ingves: Evaluation of the Riksbank's monetary policy and work on
financial stability 2005-2010
Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank and Chairman of the Basel
Committee on Banking Supervision, to the Riksdag Committee on Finance, Stockholm,
31 August 2011.
* * *
The Riksdag (the Swedish parliament) and the people of Sweden must be able to see that
the Riksbank is doing its job well. It is therefore necessary for them to have good insight into
our work and for the Riksdag to be able to make regular evaluations of this work. The
evaluations are also important for the Riksbank to be able to develop and improve its
analyses. We have already said on several occasions that we consider it an excellent
initiative by the Committee on Finance to regularly commission highly-qualified external
experts to evaluate our work. Today, when we are to discuss the second evaluation of this
type, I would therefore like to begin by thanking Professors Goodhart and Rochet for carrying
out this work on behalf of the Riksdag Committee on Finance.
We also welcome the Committee on Finance's decision to give the evaluators the task not
only of assessing how we conduct monetary policy, but also how we manage the task of
promoting a safe and efficient payment system, that is, what we have interpreted as our
responsibility for financial stability in Sweden. We at the Riksbank prefer to present our more
detailed views on the evaluation during the consultation rounds, so today I intend to make a
few more general comments.
Regarding financial stability - we need clear legislation and efficient institutions
I do not believe that anyone would still doubt that the risk of a financial crisis is a very real
risk that we must learn to live with and to manage in the best possible way. It is probably also
quite clear what is at stake here - a financial crisis could entail substantial costs for society.
We must therefore learn from the experiences of the crisis and ensure that we are as
wellequipped as possible to face any new crises in the future. This requires in an initial stage
taking an overall approach to both crisis management and crisis prevention work, something
that the government's recently-appointed financial crisis commission has been tasked to deal
with. Ultimately, the goal is to establish effective legislation and efficient institutions.
The financial crisis that we have lived with over the past few years has tested institutions and
legislation to breaking point, in Sweden and abroad. This has highlighted some old
weaknesses in the legislative framework, and we have also discovered some new
deficiencies. Even before the Committee on Finance's evaluation was published, the
Riksbank pointed out a number of weaknesses that require attention in a proposal to the
Riksdag.1 It is therefore gratifying that Goodhart and Rochet clearly point out largely the
same weaknesses.
The evaluation has had greater scope to discuss these weaknesses in more detail than was
possible in the Riksbank's proposal, and it also highlights a number of important principles as
to how one can conduct and organise the financial stability work. I believe that these
arguments in particular can provide a valuable contribution to discussions in Sweden and to
our own development work at the Riksbank, but perhaps most of all to the work of the
financial crisis committee.
Something I consider to be quite crucial in this context is that we do not create institutions
that lack the necessary power to make decisions. By this I mean that in all parts of the work
on preventing and managing financial crises we should have some institution that is clearly
responsible and this institution should also have the necessary mandate, tools and resources
to handle this responsibility. When it comes to putting this into practice I believe that
Goodhart's and Rochet's more theoretical reasoning regarding allocation of responsibility
and institutional solutions could be very useful. But, as they are also careful to point out, the
principles they discuss must be implemented in a way that suits each country's individual
characteristics. And each country must find its own way.
Regarding monetary policy - even uncertain forecasts have some value
When it comes to monetary policy, we are pleased at Goodhart's and Rochet's conclusion
that the Riksbank has discharged its fundamental duty - to conduct a policy of flexible
inflation targeting - well. As I mentioned earlier, we will return with more in-depth views on
the evaluation during the coming consultation process, but I nevertheless intend to take this
opportunity to say a few words about some of the recommendations put forward.
One recommendation in the monetary policy areas is that we at the Riksbank should in future
express a little more "self-doubt" when putting forward our proposed paths for policy rates.
We can achieve this either by a greater emphasis on the uncertainty of interest rate
forecasts, or by basing them beyond some horizon on some formula that incorporates the
market yield curve. The reason given for this recommendation is that there is no real
information in interest rate forecasts that extend further than a couple of quarters ahead.
We at the Riksbank are well aware of how uncertain interest rate forecasts are in the longer
run and we have therefore endeavoured to draw attention to this uncertainty. We have done
so, for instance, by publishing uncertainty bands around the interest rate paths and by
repeatedly emphasising the fact that the repo rate path is a forecast and not a promise. Of
course we can make further efforts to point out the uncertainty of these forecasts if
necessary, but we believe that the market and the general public have already understood
that the forecasts are uncertain in the longer run and should therefore be taken with a pinch
of salt. One indication of this, which Professors Goodhart and Rochet also point out, is that
"the market seems to have retained a, healthy, scepticism whether the official projections
would be realised" during the period we have been publishing a repo rate path. This applies
in particular to the period following the global financial crisis, when there was extreme
uncertainty surrounding all of the forecasts.
However, the fact that interest rate forecasts in the longer run are uncertain does not mean
that we should not make such forecasts. And when we make our own interest rate forecasts
we should also publish them. By publishing these forecasts we can explain more clearly to
the general public and the market how we view future developments and how we reason
when making our monetary policy decisions. I find it difficult to see how this could be harmful.
To instead base long-term forecasts on market expectations of the policy rate is a method we
have already tried and decided to abandon. If we use market expectations of the policy rate
as a starting point, it may be difficult to determine how the interest rate is connected to other
developments in the macro economy. Our own forecast for the interest rate has the
advantage that it is produced together with the forecasts for GDP, inflation, employment and
so on. Moreover, market expectations can vary substantially over time, which can lead to the
information content in the macro forecasts as a whole declining.
The evaluators also consider that the Riksbank's schedule for the different stages in the
monetary policy process does not correspond to how the forecasting and policy-making work
is carried out since the new repo rate path was introduced. In their view, the changes have
meant that, in practice, the actual interest rate decision has been brought forward. They
therefore recommend that the Riksbank should announce the monetary policy decision and
interest rate path earlier, namely directly after the meeting of the Executive Board that is held
a couple of days after the second monetary policy group meeting.
However, we consider this proposal to be difficult to implement. Although the analyses and
forecasts are largely complete by the second monetary policy group meeting, the monetary
policy decision is made at the monetary policy meeting and not before then. Any reservations
against the decision are put forward at this meeting, too, and not earlier.
In conclusion, let me once again thank Professors Goodhart and Rochet for their valuable
contribution to our continued work on both monetary policy and financial stability. We will
have many opportunities during the course of this work to discuss with the Committee on
Finance how we can develop and improve our analyses.