Few doubt that there are challenges to defining and calibrating the indicators used to determine when capital buffers should be triggered, and by how much. However, to quote Borio, “while calibration is  17  Assenmacher-Wesche and Gerlach (2010). 18  Hott and Monnin (2008). 19  For examples of models which illustrate downward spirals, please refer to Markus Brunnermeier and Lasse Pedersen (2009), Stephen Morris and Hyun Song Shin (2004). BIS central bankers’ speeches  5  not straightforward, the difficulties can be overstated”.20 To support his claim, Borio notes that traditional monetary policy also confronts such challenges when interest rates are set on the basis of indicators, such as output gaps or natural interest rates which are unobservable and difficult to measure accurately. It is however commonly accepted that central banks have, to a large extent, surmounted these difficulties. Of course, countercyclical buffers cannot be implemented without inflicting some costs to the economy, but the trade-off involved seems significantly more favourable than is the case with “leaning against the wind” policies. A 2011 study by the Bank of International Settlements estimates that, by reducing the probability of a severe crisis, the benefit of countercyclical buffers is on average 10 times higher than their costs in terms of real output growth per year. V.  The Swiss case  Every central bank in the world faces its versions of the challenges I have mentioned. The Swiss National Bank is no exception.
Much high quality work has already been done on this subject by local experts. However, they thought it might be helpful for the New York Fed, as an independent third party, to evaluate what might be done to promote competitiveness and productivity on the Island. I readily agreed that we would do so. I commissioned a team of economists from our Research group and other experts from our international and outreach teams, to analyze the challenges facing Puerto Rico. I asked them to put forward some recommendations on how to capitalize on the Island’s strengths and restore growth. The report released today on the competitiveness of Puerto Rico’s economy, is the product of their work and extensive consultation with local, national and international experts. I have  BIS central bankers’ speeches  1  read it closely and commend it to your attention. The report is intended as nonpartisan technical analysis and should be viewed in that vein. Even those who do not agree with every aspect of the analysis, I hope, will acknowledge that this is a serious, good-faith effort to examine, in detail, a number of important issues that deserve attention. Of course, many of these issues can only be considered as part of the political process. It is for the people of Puerto Rico to judge the appropriate trade-offs involved – not me, certainly, or my staff at the New York Fed. In a few moments Jamie McAndrews, executive vice president and director of research, will summarize the report and its recommendations.