However, the fact that monetary policy is not just directed towards stabilising inflation, but also towards stabilising resource utilisation has, in the absence of quantitative measures of stability in these variables, made it difficult to measure and evaluate target fulfilment in this stability dimension. This makes it difficult to decide which policy-rate path best stabilizes both inflation and resource utilization. My suggestion is to use mean squared gaps for the inflation forecast and for the resourceutilization forecast as measures of the stability of inflation and resource utilization. 3 Figure 1 provides an example, using graphs from Norges Bank’s Inflation Report of June 2005. Figure 1 Monetary policy with mean squared gaps (Norges Bank, June 2005)  In figure 1, the top left panel shows three alternative policy-rate paths, the main path chosen by Norges Bank at the time and two alternative paths, a lower and a higher path. The top right panel shows the corresponding forecast of inflation according to the index CPI-ATE, the consumer price index adjusted for tax changes and excluding energy products. The bottom right panel shows the corresponding forecasts of the output gap, the gap between output and potential output. These three panels are shown in the June 2005 Inflation Report. We see that there is a tradeoff between stabilizing inflation and resource utilization, measured as the output gap. The lower (higher) policy-rate path stabilizes inflation better (worse) around the  3  See Svensson (2010a, c) for details.

In times of crisis, authorities may use instruments such as lending of last resort, variable-rate lending at longer maturities (credit policy, credit easing), special resolution regimes for financial firms in trouble, government lending guarantees, government capital injections, and so forth. 2  BIS central bankers’ speeches  My point here is that this has to be taken into account when considering the lessons of the financial crisis for monetary policy. The interest rate is a blunt and unsuitable instrument for achieving financial stability and it thus makes little sense to assign the objective of financial stability to monetary policy. However, it may make sense to assign the objective of financial stability to the central bank, if the central bank is given control of the appropriate supervisory and regulatory instruments. The fact that financial-stability policy and monetary policy are different does not mean that there is no interaction between them. This interaction need to be considered. Monetary policy affects asset prices and balance sheets and can thereby affect financial stability. Financialstability policy directly affects financial conditions, which affect the transmission mechanism of monetary policy. This means that monetary policy should normally be conducted taking financial-stability policy into account, and financial-stability policy should be conducted taking monetary policy into account. This is similar to how fiscal policy is conducted taking monetary policy into account, and monetary policy is conducted taking fiscal policy into account. Importantly, under normal conditions, financial stability is handled by financial-stability policy, not by monetary policy.