Stefan Ingves: Monetary policy and financial stability Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank, to the Riksdag Committee on Finance, Stockholm, 13 November 2008. *  *  *  Counteracting the effects of the global financial crisis When I have opened my daily newspaper in recent months the headings have often concerned crises, stock market collapse and economic downturn. The contagion effects of the US mortgage crisis that have been around since summer last year, have taken on proportions hardly anyone expected. In mid-September the international financial turbulence entered its most intensive phase so far. The global financial system has since then been shaken to its foundations and even countries like Sweden – far from the centre of the crisis – are tangibly affected. The Riksbank’s main tasks are to safeguard financial stability and price stability. To manage these we are now continuously taking various measures to counteract the effects of the financial turbulence on the Swedish economy. Other authorities, the Government and the Riksdag have also implemented measures to the same end. One thing I have learnt from the years I have worked with managing financial crises is that things can change rapidly. Each situation is unique and must be dealt with on the basis of the conditions prevailing there and then. Although Sweden has long been on the periphery of the turbulence in the financial markets, we are now more strongly affected. When the situation requires it, we must be flexible and act both quickly and powerfully.

Properly designed and implemented, such an overshoot can offset the inflation undershoot during “bad” times so that the longer-run average inflation rate and inflation expectations are in 2/3  BIS central bankers' speeches  line with the target. The third option is price-level targeting, including its various offshoots, such as nominal GDP targeting and temporary price-level targeting. In such a regime, the central bank commits to keep the price level near a steadily growing target path. Like average-inflation targeting, this strategy promises to overshoot the target inflation rate in “good” times to make up for the inflation undershoot when policy is constrained. In theory, both average-inflation and price-level targeting can solve the problem of anchoring inflation expectations at the target rate while maintaining a low inflation target rate amid low neutral rates. Although price-level targeting is a bigger leap from inflation targeting than averageinflation targeting, each can be implemented in ways that are very similar to standard inflation targeting, either in terms of forecast-targeting or a policy rule.6 Importantly, neither will likely be effective in practice unless communicated clearly and carried out consistently over time. More broadly, all of these proposed strategies face potential costs and benefits—in terms of macroeconomic performance, communication, and robustness to uncertainty—which require careful study. In considering alternative monetary policy strategies, academic experts, policymakers, and others from around the world have an important part to play, sharing and discussing ideas and comparing experiences to help all of us to think through these issues.