It’s important to keep in mind that the Taylor rule’s theoretical underpinnings are loose, especially compared with the seminal 1979 John Taylor article 10 on optimal monetary policy in a rational expectations model with sticky prices. Indeed, the Taylor rule parameters are not necessarily stable. In particular, consider the intercept term. The usual specification of the rule assumes that this intercept term is a constant 2 percent equilibrium level of the real interest rate. However, it is well known that equilibrium real rates of interest are not constant, and modern macroeconomic models of optimal monetary policy all take this into account. Assuming that the equilibrium real interest rate is constant is just as egregious an error as failing to account for the time-varying nature of the natural rate of unemployment. We all know that mis-specifying the natural rate of unemployment can lead to seriously inappropriate monetary policy outcomes like double-digit inflation in the 1970s. It certainly seems that the fallout from the financial crisis and persistent headwinds holding back economic activity are consistent with the equilibrium real interest rate being lower than usual today. Indeed, if you put any weight whatsoever on the secular stagnation hypothesis that Larry Summers and Paul Krugman have described, 11 an appropriate analysis would recognize lower expected real rates of interest.
Given that all the Swedish banks benefit from the Riksbank’s foreign-exchange reserve, it would not be unreasonable for them to share the costs of maintaining it. If we can price this in an effective way it will also give the banks an incentive to reduce their own currency risks. This would reduce the risks to financial stability in the Swedish economy. BIS central bankers’ speeches  9  It is of course no secret that we are also looking at mortgage loans from the asset side in the banks’ balance sheets. As I have already pointed out, the banks’ risk weights are very low. Finansinspektionen intends to begin applying a risk-weight floor of 15 per cent for the banks’ portfolios of Swedish mortgage loans. The Riksbank supports the proposal for a risk-weight floor of 15 per cent. We also believe that there are good reasons for analysing whether this floor needs to be raised even further. One important reason is that the public sector and non-financial companies would have to bear a large part of the risk if the debt-servicing ability of the households were to weaken. I have also spoken about the risks arising from the fact that a large proportion of the mortgage loans are interest-only loans. In this context, the Swedish Bankers’ Association’s recommendation that all mortgages that exceed a loan-to-value ratio of 75 per cent should be amortised is of course welcome, although one may ask whether this is enough.