In Sweden, the Financial Supervisory Authority is responsible for supervision and regulation, the Riksbank is responsible for lending of last resort to solvent banks and for promoting a safe and efficient payment system, while the National Debt Office is responsible for the resolution of failed banks. During times of crisis, these authorities cooperate closely with the Ministry of Finance. My point here is that financial-stability policy and monetary policy are quite different, with different objectives, instruments and responsible authorities, the latter with considerable differences across countries. This does not mean that there is no inter-action between them. Financial stability directly affects the financial markets, and financial conditions affect the transmission mechanism of monetary policy. Problems in financial markets may have a drastic effect on the real economy, as the current financial crisis has shown. Monetary policy affects asset prices and balance sheets and can thereby affect financial stability. But the fact that financial-stability policy and monetary policy are conceptually distinct, with distinct objectives and distinct suitable instruments, has to be taken into account when considering the lessons of the financial crisis for monetary policy. In particular, it makes little sense to extend the mandate of monetary policy to include financial stability. 15 What are the specific conclusions for flexible inflation targeting? One important lesson from the financial crisis is that financial factors may have a very strong and deteriorating effect on the transmission mechanism, making standard interest-rate policy much less effective.

Monetary and financial stability The global financial system has developed at an unprecedented pace in the last two or three decades. During this time, many countries have undergone significant processes of financial liberalisation that have contributed to deeper and wider markets, in terms of both the number of participants and the assets traded on them. In the international sphere, financial liberalisation has led to a growing number of countries gaining access to global capital markets and to a stepping up of the economic and financial links among different regions. Technological progress has also played an important role. The ability of market participants to obtain and process vast amounts of information almost instantaneously and to conduct complex transactions at low cost has grown enormously. In short, all these changes have significantly increased the possibilities for risk-sharing among economic agents. And, as such, there is ample consensus that this process of financial deepening brings tangible benefits for businesses, households and governments alike. There is little doubt either that this phenomenon will continue its course over the foreseeable future. In parallel to the changes on the financial landscape, we have also witnessed a remarkable performance by our monetary policy frameworks in terms of attaining and maintaining low and stable inflation, with noticeable effects on economic welfare. I believe that those achievements are largely permanent. I further consider that, as stressed by Alan Blinder in the introduction to his insightful paper, the debate over some of the core principles for sound monetary policy practice seems to be resolved for now.