Willem F Duisenberg: New economy, financial markets and monetary policy Speech by Dr Willem F Duisenberg, President of the European Central Bank, at the meeting of the Zürcher Volkswirtschaftliche Gesellschaft, Zurich, 19 May 2003. *  *  *  Introduction Ladies and Gentlemen, I am delighted to be here to address you this evening, and I should like to start by thanking the Zürcher Volkswirtschaftliche Gesellschaft for inviting me to do so. Being trained economists, you all know that in the course of the past century, monetary theory has faced significant challenges from various angles - the Keynesian revolution, the neo-classical synthesis, the monetarist counter-revolution, the emergence of new classical economics with the introduction of the concept of rational expectations, and real business cycle theories. Similar to the experience of monetary theory, monetary policy has had to cope with major challenges as well. We all know that the economic and financial environment in which monetary policy has to operate is continuously changing. During the past few years - as has been rather obvious - these changes have included the discussion about a “new economy” and, driven by the interrelated processes of financial liberalisation and financial globalisation, the growing importance of financial markets. You may wonder why someone should raise the topic of the “new economy” again, as it has been discussed so extensively by many, including myself, on many an occasion before. Is this not a topic which has actually become rather “old” by now; another chapter in the history books of economic science?

In order to ensure an orderly transition, it is vital that the changeover to SARON on the credit and derivatives markets occur as early as possible. The supply of SARON-based products on the credit market is increasing. For example, various banks have launched SARON-based mortgages in recent months. However, the SARON-based derivatives market is still significantly less liquid than its Liborbased counterpart – turnover on the SARON-based derivatives market remains considerably lower than turnover on the Libor-based market (cf. chart 4). As we do not have a consistently liquid government bond curve in Switzerland, the interest rate swap curve is very important as a reference for pricing fixed-interest loans and bonds. With the discontinuation of Swiss franc Libor, this critical reference function will be performed by the SARON-based interest rate swap curve. It is important that Libor-based contracts that cannot be switched to SARON before the end of 2021 are furnished with robust fallback clauses. The International Swaps and Derivatives Association (ISDA) has recently published such fallback clauses for derivatives contracts. Robust fallback clauses minimise the risks associated with the discontinuation of Swiss franc Libor, thereby providing a safety net. The SNB itself continues to make progress with the changeover to SARON – we will have no outstanding Libor-based derivatives in our investment portfolio by the end of 2021. Moreover, from end-2021, we will exclude all Libor-based floating-rate notes from the list of collateral eligible for SNB repos when implementing monetary policy.