##ksbank fulfilling its function, the inflation target can serve as a benchmark for their decisions about prices and wages. so what effects might the new economy have in this simplified world? it could result in a more favourable path for productivity and thus a stronger expansion of potential output - a steeper path for trend growth - at least for a time. demand could then rise more rapidly without exceeding the long - term capacity ceiling and generating inflationary pressure. it is conceivable, moreover, that the new economy can lower price pressure in the economy even without an appreciable positive effect on productivity as usually measured. it is possible, for example, that internet commerce and generally stronger international competition could tend to restrain inflation by making it more difficult for firms to raise prices. that could lead to a reduction of inflation that does not have to do with the level of demand in relation to trend growth. it may be worth noting that strong competition as such does not necessarily imply lower inflation. there are many indications, on the other hand, that downward price pressure can be generated during the transition from lower to higher competition. as such a process probably takes a considerable time, the mounting competition ’ s impact on inflation will also be protracted. another consequence of the new economy - perhaps the least controversial - is the direct effect on inflation from the steep price fall for it - related products, which are not a negligible item in the cpi basket. the falling prices are explained in turn by the very strong productivity growth and high rate of innovations in this product area. the result may be what is commonly known as a positive price shock, which in many respects resembles the effects of a marked price fall for some other specific cpi component. so far i have discussed the monetary policy implications solely in terms of a notional new economy ’ s consequences for supply. new techniques and strong productivity growth leave their mark on profit expectations and capital formation, for example, and thereby add to the forces that are raising potential growth. with rising share prices, however, increased household wealth adds to demand. this raises questions to do with dynamic aspects. one risk is that demand grows faster than supply despite an improvement in potential output. that could lead to stronger price pressure and accordingly motivate a tighter monetary stance in the traditional way. another risk is that investment activity becomes unduly optimistic and leads to financial imbalances. this problem is more difficult to handle in monetary policy ’ s normal analytical framework, where undesirable

credit boom, it is better to use other tools than monetary policy to influence indebtedness among households and developments on a specific market, such as the housing market. in the case of sweden, one can claim that the repo rate has for several years been set higher than is strictly justified by inflation and resource utilisation. 4 but household indebtedness was not explicitly mentioned as a reason until the repo - rate decision in october 2012. the repo rate had then been gradually cut from 2 per cent at the end of 2011 to 1. 25 per cent in september 2012. in october 2012, the repo rate was then held unchanged and household debt was for the first time treated as a factor in the monetary policy deliberations, both in the monetary policy report and the press release on the repo - rate decision. however, the repo rate was cut further, to 1 per cent in december 2012. it then remained at this level for one year, until december 2013, despite low inflation and an inflation forecast that had been revised down substantially, as well as unemployment that seemed stuck at around 8 per cent. in december 2013, the repo rate was cut further to 0. 75 per cent. during the period between december 2012 and december 2013, i felt that the consideration given to household indebtedness was preventing the further repo - rate cut that i considered justified. others also lean, but under different circumstances we in sweden are far from alone in feeling that rising indebtedness driven by rising house prices poses a threat to financial stability. other central banks have also given explicit consideration to such threats when formulating their monetary policy. of those countries that are comparable with sweden in the sense that they are developed economies with inflation targets, norway, canada, australia and new zealand are the ones that can be said to have conducted a monetary policy that to some extent leans against the wind. sweden does however stand out in that inflation has been clearly below the target in recent years, at the same time as unemployment has been relatively high. 5 policy update published in april 2013 states that the monetary policy conducted “ is expected to stimulate economic developments and inflation at the same time as taking into account the risks linked to households ’ high indebtedness ”. an article in the monetary policy report published in july 2013 presents a conceptual framework for taking into account financial imbalances in the monetary policy assessment. for a review and categorisation of various points of view