Finally, if we are to use dispersion as a yardstick for the efficacy of monetary policy implementation, we should make use of individual transaction-level data to see how effective our tools are at uniformly affecting traded rates within each money market. Because transaction-level data are not publicly available, Darrell and Arvind’s index is based on “average” or “market” rates for each asset class. This means that they can assess only dispersion across money markets, rather than both across them and within them. Evaluating efficacy using transaction level data In my view, the difference between dispersion within markets, and dispersion across markets, is revealing about the nature of underlying changes in money markets. If competition were to become impaired, I might expect to see greater dispersion in rates within each individual market, as the decline in competition might allow for greater market power by individual borrowers and lenders, and therefore permit more price discrimination. In contrast, if intermediation were to be impaired, I would expect to see higher dispersion across money market rates, and more variable dispersion over time, even for very similar investments. This is because impairments to intermediation could result in greater market segmentation. Of course, such changes in dispersion either within or across markets could also result from other changes, such as movements in risk premia. One way of reducing the impact of movements in risk premia is to focus on overnight transactions only.
The most concrete example of reform based on the lessons learned from the crisis is that macroprudential policy has been established as a separate economic policy area. Over the last ten years, intensive efforts have been made around the world to define and implement macroprudential policy. Sweden has made some progress but more needs to be done. At the end of last year, Finansinspektionen, which has the main responsibility for macroprudential policy, was given the goahead by the Government to introduce a tougher amortisation requirement. This is, in itself, a positive development. But a regulatory framework that makes macroprudential policy more flexible needs to be put in place so that measures can be implemented quickly when necessary. Macroprudential policy can be specifically focused on reducing the risks associated with household debt. But the Riksbank’s assessment is that a combination of different measures is required in several policy areas to reduce these risks. 12 Above all, the fundamental causes of rising indebtedness need to be dealt with, something that is difficult to do without first tackling the Swedish housing market and its inherent imbalances. This is of course no easy task. But nevertheless an urgent one. As I mentioned earlier, the interest rate will be lower on average in the period ahead, sometimes much lower if monetary policy is to be able to meet the inflation target. The financial side of the economy needs to be robust enough to cope with such periods without macroeconomic developments being exposed to too large risks.