Svensson, “Inflation targeting”, in B. M. Friedman and M. Woodford, (eds. ), Handbook of Monetary Economics, vol. 3, pp. 1237–1302, Elsevier, 2010. BIS central bankers’ speeches  3  account the mean value for the forecast: the uncertainty over future shocks does not affect the optimal monetary policy (in technical terms one says that certainty equivalence holds). The uncertainty then does not affect the decision on the repo rate, but it does affect target fulfilment. However, there are several aspects that mean that one cannot rely on the results obtained in this type of model. The Riksbank reports a main forecast that is not merely a model forecast; it is based on both models and judgement. It is not easy to explicitly report all of the assessments and deliberations behind the overall results. However, it is possible to do this within the framework of a formalised model like the Riksbank’s macro model Ramses.11 But of course, this is not a perfect description of reality. There is uncertainty over both the structure of the model and its parameters. Other models would probably reach other results with regard to the most appropriate monetary policy. Another question concerns the nature of the forecasts. The forecasts the Riksbank now reports are in principle intended to be unbiased forecasts. But as Goodhart and Rochet pointed out in their evaluation of the Riksbank’s work, these assumptions do not hold in reality.12 In practice, longer-term forecasts are rarely unbiased. They can rather be regarded as possible scenarios contingent on certain external conditions.
For instance, we now have a far more stringent and more harmonized definition of regulatory capital. The need for common and internationally harmonized capital and liquidity requirements has been broadly recognized and will be made operational in the near term. Basel 3 represents therefore an ambitious goal. At the same time, it has been set in a cautious way in order not to impact the financing of the economy and the global growth. Those latter points are the reasons for the rather long phasing in, that has been put in place by the Basel Committee. This phasing in period should also enable countries that did not move to Basel 2 – namely the US –, to implement Basel 3 at the same pace than European banks. As a matter of fact, I consider it essential that implementation of this new framework both in Europe and in the US be concomitant – and exhaustive and I am far from being the only one. As a matter of fact, experience shows that if a reform is not implemented globally, weaknesses remain. The American administration is very positive and determined about it, so I trust that can be done. Failure to implement Basel 3 in a globally consistent way would lead to a competitive race to the bottom and may thus plant the seeds for another crisis. 1.3 Last but not least, another area in which significant progress has been made since the crisis is the accounting framework.