I will also mention the on-going discussion on Libor and Stibor as this has been a major news item during the summer. I have chosen to call this a “springboard” for the monetary policy meeting in September. This is not intended to direct one’s thoughts to sporting achievements, which can easily happen, given that the Olympics are still fresh in our minds. What I mean to indicate is that this is a status report on which to base the start-up of a new process, which for the Riksbank is a process that will lead to a new joint economic assessment. I will not be presenting this type of assessment today. This will be released in connection with the next monetary policy meeting on 5 September. The assessment in the July Monetary Policy Report Great uncertainty over future developments Perhaps the most difficult question we had to deal with at the most recent monetary policy meeting was how an unexpectedly strong outcome in Sweden at the beginning of the year should be viewed in relation to increased concerns over poorer developments in the euro area. When we Executive Board members gathered in July, concerns on the financial markets regarding the crisis in the euro area had increased and the prospects for growth in Sweden had thus deteriorated. There was considerable uncertainty over future developments. Work was underway on resolving the problems in the euro area. But it was also clear that much remained to be done before sustainable solutions could be implemented.
Over that period, the Taylor rule suggested US monetary policy was looser than could be explained by inflation and output alone. Whether by coincidence or causality, what happened next in US credit markets was dramatic. Chart 3 plots the ratio of US credit-to-GDP, relative to its long run trend, over the same period – the “credit gap”. This indicator has a special significance from a regulatory perspective because it will act as a guideline path for the setting of the CCB once Basel III comes into effect. The US credit gap rose steadily from around 2001 up until 2008. Relative to its long-run trend, credit-to-GDP reached a peak of over 10 percentage points. By historical standards, this is a huge credit boom. We can now ask ourselves the counter-factual question, how different might the world have looked had macro-prudential policy been available to assist monetary policy? Answering this question rigorously would require that we re-run the paths of policy, the economy and the financial system over this period – a full counter-factual simulation. That is beyond the scope of this paper. As a shorthand, we can still do something simple but nevertheless informative about the way the world might have looked. This is done by simply redrawing the path of US banks’ capital ratios on the assumption that the CCB had been in place. In particular, we can use the Basel III calibration of the link between the CCB and the credit gap to simulate a hypothetical path for US banks’ capital ratios.