Second, the Rule has the desirable feature that when economic shocks push the economy away from the central bank’s objectives, the Taylor Rule prescribes a policy response that can help push the economy back toward the central bank’s goals. Third, a number of studies have shown that Taylor Rules are robust in the sense that they generally perform quite well across a range of different assumptions about how the economy is structured and operates. Despite these attractive features, I don’t believe that any prescriptive rule, including the Taylor Rule, can take the place of a monetary policy framework that incorporates the FOMC’s collective assessment of the large number of factors that impact the economic outlook. 1  Jonathan McCarthy, Paolo Pesenti, Argia Sbordone and Joseph Tracy assisted in preparing these remarks. BIS central bankers’ speeches  1  As I see it, the Taylor Rule has several significant shortcomings that can be detrimental to the attainment of the Federal Reserve’s mandated objectives. These shortcomings are not just theoretical; they have been very relevant to monetary policy in recent years. First, the Taylor Rule is not forward-looking. Its policy prescription is based on the current size of the output gap and the deviation of current inflation from the Fed’s objective, not on how these variables are likely to evolve in the future.
As the savings show, our new rules do an even better job of recognising the characteristics associated with lending to pools of SMEs compared to other forms of credit-giving. The status of the New Accord Let me conclude with a word on the status of our work. The Committee has asked for final public comments on the “third draft” of the rules by July 31 of this year. We would certainly welcome comments on any aspect of the proposals related to SME lending and will give full consideration to whether any final changes may be necessary. The Committee expects to approve and publish the final text of the New Accord this year, and for the new rules to be implemented at the end of 2006, which gives bankers and supervisors three years to prepare. Other countries are likely to seek to adopt the New Accord in roughly the same timeframe, or perhaps thereafter, depending on national circumstances. While this will require substantial efforts from bankers and supervisors, we all acknowledge that better tools are needed for measuring the risks that banks face. Likewise, we know that, for banking supervision to remain robust and relevant, our rules must keep pace with changes in the industry. This includes incorporating what we’ve learned about the unique characteristics of small business lending in recent years. We are confident that the New Accord will be worthy of the efforts made. Thank you for your attention. I would be very happy to answer any questions you may have.