Even before the crisis, there was of course an insight that financial imbalances entail risks for macroeconomic developments and for financial stability. Maintaining financial stability has traditionally been one of the central bank’s main tasks, in addition to maintaining price stability. And analysing financial risks has been an important part of this work. But in the standard framework, financial risks and other financial stability aspects could, and even should, on the whole be kept separate from the monetary policy deliberations – at least over and above the impact that these factors have on the inflation forecast and economic outlook for the coming years.4 There were of course arguments in favour of monetary policy explicitly taking financial risks into account.5 These discussions most often concerned “bubbles” on the asset markets and whether monetary policy should counteract their build-up – “leaning monetary policy against the wind” as it came to be called. However, the consensus among both practicians in central banks and academics was that this is difficult and that in practice it can do more harm than good. Better then to wait and to use monetary policy to stimulate the economy once the bubbles had burst – to “clean up afterwards” instead. However, the financial crisis showed that the effects of financial imbalances and, in some cases, financial instability could be enormous and that the “cleaning up” could require massive and prolonged efforts from economic policy. The earlier consensus has thus been increasingly brought into question.

Keynote speech at the 6th ECB Central Banking Conference “Approaches to monetary policy revisited – lessons from the crisis”, 19 November 2010. ECB. Stein, Jeremy C. (2013), Overheating in Credit Markets: Origins, Measurement and Policy Responses. Speech at the research symposium Restoring Household Financial Stability after the Great Recession: Why Household Balance Sheets Matter. Federal Reserve Bank of St. Louis. Stein, Jeremy C. (2014), Incorporating Financial Stability Considerations into a Monetary Policy Framework. Speech at the International Research Forum on Monetary Policy, 21 March 2014. Board of Governors of the Federal Reserve System. BIS central bankers’ speeches  11  Svensson, Lars E.O. (2012), Comment on Michael Woodford “Inflation Targeting and Financial Stability”. Sveriges Riksbank Economic Review, 2012:1, Sveriges Riksbank. Svensson, Lars E.O. (2013), The Riksbank is wrong about the debt – a higher policy rate increases (not reduces) the household debt ratio. Post on the blog Ekonomistas, 26 August 2013. Available at ekonomistas.se. Sveriges Riksbank (2013), Financial imbalances in the monetary policy assessment. Article in Monetary Policy Report, July 2013. Sveriges Riksbank (2014), The effects of monetary policy in household debt. Article in Monetary Policy Report, February 2014. White, William (2009), Should Monetary Policy “Lean or Clean”? Working Paper No. 34, Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute. White, William (2013), The prudential regulation of financial institutions: Why regulatory responses to the crisis might not prove sufficient. SPP Research Papers 6 (33). Woodford, Michael (2012), Inflation Targeting and Financial Stability. Economic Review 2012:1, Sveriges Riksbank. 12  BIS central bankers’ speeches