Properly managed and analysed, taking financial imbalances into account in monetary policy decisions – under certain conditions – means that target fulfilment should be better in the long run. Interaction between monetary and fiscal policy As mentioned above, monetary policy and financial stability are interdependent, but so are monetary policy and fiscal policy. The interaction between these two policy areas plays a central role in the Riksbank's ability to attain low and stable inflation. Some simple reasoning can illustrate the interaction.34 For example, if the central bank cuts the policy rate, the government's interest payments decrease and there is greater scope for a more expansionary fiscal policy. Another example is when the central bank buys government bonds. Among other things, this can mean that the government has lower costs for new borrowing at longer maturities. Conversely, fiscal policy also affects monetary policy. A more expansionary fiscal policy increases demand and ultimately also inflation and thus affects monetary policy. There are also many historical examples where fiscal policy has led to disruptions in the financial system with consequences for monetary policy. Episodes of hyperinflation are extreme examples, but there are also examples of milder crises from, for example, the euro area. Stable public finances are a prerequisite for price stability. If the government's future capacity to obtain tax revenue were to be less than future expenditure, the credibility of the inflation target would be undermined.35 This implies fiscal dominance and can lead to rapid price increases.

14 [30]  One lesson to be learned from the post-financial crisis period is that an expansionary monetary policy over a long period of time can entail a conflict between price stability and financial stability. The conflict was exacerbated by the signs that new problems could manifest themselves in the financial markets if the large asset purchases were concluded prematurely. This was called “taper tantrum”.23 There was also a risk that the private sector had become so dependent on central bank liquidity that the effect of reducing the balance sheets could be greater than the stimulus provided by the asset purchases.24  Risk of new conflict between price stability and financial stability after the pandemic When the pandemic broke out at the beginning of 2020, central banks introduced further expansionary monetary policy measures to facilitate access to credit and liquidity, thereby reducing the risk of interest rates rising so strongly that the economic situation worsened. This time, too, there was no conflict between price stability and financial stability. The expansionary monetary policy increased demand – which helped to sustain inflation – while supporting financial markets. A central task for central banks in acute phases of economic crisis is to be the lender of last resort. Recently, the central banks’ task of ensuring that the markets function (market maker of last resort) has also come into focus. If viable and systemically important banks in distress experience temporary liquidity problems, they can apply to the central bank for emergency loans.