Professor John Taylor, currently a Treasury under-secretary in the Bush Administration, has formulated a simple rule for interest setting that has come to be named after him and been widely recognised. With the Taylor rule, the instrumental rate varies around an equilibrium rate with a correction for actual inflation’s relationship to targeted inflation and resource utilisation (GDP growth’s divergence from an estimated trend). Given that the economy is in equilibrium, inflation is 2 per cent and the output gap is zero, in Taylor’s version of the rule for the United States the nominal instrumental rate is 4 per cent. Divergences in resource utilisation or inflation prompt the central bank to raise or lower the instrumental rate, depending on the size and direction of the deviations. The Taylor rule is popular for several reasons; besides being relatively simple, it seems to give a relatively good account of monetary policy in many different countries. In that way it has contributed to a better understanding of how monetary policy is conducted. To date, however, no central bank has explicitly stated that it has chosen to base its monetary policy on the type of rule John Taylor advocates. BIS Review 24/2002  3  One result that a money supply target and the Taylor rule have in common is that monetary policy’s responses to the various shocks to which an economy is constantly being exposed are systematic and predictable.
Enlarged participation in the SSM is a great opportunity for setting a level playing field in supervisory practices across the EU. At the same time, a series of conceptual questions need to be addressed. For one, it is hard to imagine that countries not participating in the European Stability Mechanism (ESM) might act as a financial safety net for troubled but solvent banks, in the event that a privately financed resolution fund is not yet adequately funded. The next steps The establishment of the SSM represents a great opportunity for financial integration in Europe. Let me now turn to the next steps in the establishment of the SSM. First, the swift adoption of the SSM Regulation is essential. Definite plans are crucial in order to uphold the current momentum of the stabilisation of the euro. The general expectation is  4  BIS central bankers’ speeches  that the SSM will be established early this year, with an effective operational start 12 months later. Second, the design of a supervisory model, including the allocation of tasks between centre and periphery is critical for the success of the SSM. In this regard, work is already under way by the ECB in cooperation with national competent authorities – subject to the final legal wording. Third, the SSM will need to carry out a comprehensive review of the banks that fall under the direct supervision of the ECB.