“This will yield a solution in the form of an optimal path for economic and social development.” Professor Lars Svensson, one of the most prominent contemporary academics in the field of monetary policy, expresses thoughts similar to those of Frisch. Svensson recommends the following:14 “...inflation targeting central banks should announce (an) explicit loss function with numerical weights on output-gap stabilization... Simple voting procedures for forming the Monetary Policy Committee’s aggregate loss function... are suggested.” A practical approach, which is probably pursued by most central banks, is to produce projections for the economy based on different, possible interest rate paths. Decision-makers can then strike a balance between the various considerations and make decisions based on these projections.15  12  See Berg, Clas and Lars Jonung (1998): “Pioneering Price Level Targeting: the Swedish Experience 1931-37”. Conference on Monetary Policy Rules, Stockholm, 12-13 June 1998. 13  Frisch, Ragnar (1971): “Samarbeid mellom politikere og økonometrikere om formuleringen av politiske preferanser” (Cooperation between politicians and econometricians on the formulation of policy preferences). Sosialøkonomen No. 6, 1971. 14  Cf. Svensson, Lars (2003): “The Inflation Forecast and the Loss Function” in Paul Mizen (ed. ), Central Banking, Monetary Theory and Practice: Essays in Honour of Charles Goodhart, Edward Elgar. 15  For a description of principles for inflation targeting, see Lars Svensson’s presentation “What is inflation targeting?” on Norges Bank’s website: www.norges-bank.no/english/monetary_policy/workshops/2004/program-03.html.

Even though I am not the strongest advocate of our government bond purchases, we do not finance individual governments with them, directly or indirectly. Our aim is to maintain price stability. Thanks to our bond purchases, interest rates go down and loans become cheaper, primarily benefiting households and businesses. Besides, we have a very clear set of criteria for the timing, selection and volumes of our government bond purchases. Our parameters ensure that the private market for government bonds remains intact. One sign of the continuing relevance of this market is the divergence in the prices for German, Italian and Spanish government bonds. Another criticism is that the ECB defers problems rather than solving them. Owing to the low interest rates, cheap credit is even available to firms that are no longer competitive, and would otherwise have gone under long ago. These zombie firms tie up capital and employees, all of which is harmful to economic efficiency. We have only bought corporate bonds with high ratings. This has indeed improved financing conditions predominantly for the companies in question, but also indirectly for the firms with lower credit standing. However, banks lending to companies must take the risk involved into account in their financing conditions. So, basically, the higher the risk, the more expensive the loan. Moreover, European banking supervision requires more capital to cover the risk and looks very closely at credit standards. And indeed: not every group in the euro area can borrow for five years at less than 3% interest.