being discussed internationally, is the more active application of regulations to dampen risk - building tendencies and build buffers when times are good. one specific proposal is to allow the capital requirement for the banks to vary over time. this would entail a division of the total capital requirement into two components. the first of these would be a constant minimum requirement to establish the amount of capital a bank is always to hold. to this can be added a further capital requirement that varies over time by being linked to a suitable indicator of, for example, credit growth or cyclical position of the economy ( figure 7 ). figure 7 a time - varying capital requirement tier 1 capital countercyclical capital requirements m inimum requirements upturn downturn time when economic activity is strong, the capital requirement is high, and vice versa. this timevarying capital requirement has two functions. the first is to build up the bank ’ s capital buffer when times are good and then let this buffer decrease during less favourable periods. the second function is to dampen credit growth when times are good by increasing the capital requirement and thereby the bank ’ s lending costs. this increase in the bank ’ s lending costs in turn implies an increase in the interest rate margin – and thus the lending rate. in light of the discussion of “ just the right level of regulation ”, a time - varying capital requirement and other regulations varying across time may have certain advantages. their more apparent connection with risk build - up may make them less costly than the alternative of introducing a constant higher “ minimum requirement ”. one objective of varying regulations across time is to affect credit growth through the interest rate margin. this creates an additional source of variation in the interest rate margin, which can be illustrated in the lending rate equation by adding an additional time index for the regulations : itlending it t ( zt ). an interest rate margin with time - varying regulations also implies another dynamic for the transmission mechanism and is more complicated than a one - off shift. of course, this will have implications for monetary policy decision - making, which will become more complex. the application of time - varying regulations may also give rise to a more indirect effect on the interest rate margin. just as uncertainty about the future policy rate gives rise to a risk premium, so can uncertainty about the manner in which regulation will develop give rise to an additional “ regulation risk premium ”. it is already possible to see that the uncertainty prevailing around the proposed tightening of the capital and liquidity regulations

and labour threaten to gain the upper hand and jeopardise price stability is a gradual process. that makes it difficult to tell exactly when the imbalances constitute a genuine problem. observers and those who decide economic policy have to assemble the pieces of this puzzle. in an economy that is approaching a strained situation in resource utilisation, signs that imbalances are beginning to build up will appear with increasing intensity and frequency. as more and more pieces of the puzzle fall into place, they ultimately provide a basis for action. the whole of this process is complicated by the time lag before monetary measures elicit effects. our premise is that the full effect of an interest rate adjustment materialises after one to two years. so measures taken today would not have their full effect until some time during 2002. monetary policy therefore involves balancing the risks of acting too soon against those of acting too late. acting prematurely is liable to lead to unemployment being higher than it need be. if the riksbank acts too late, on the other hand, price and wage increases may already have got under way. in that case, the economy may ultimately land in a recession, perhaps with even higher unemployment. fortunately, it is not a question of either / or. a monetary policy adjustment can be decided gradually, with stepwise changes in the repo rate. consequently it is always possible to compare forecasts with outcomes, assess the policy stance continuously and make the adjustments that are considered to be necessary. if monetary policy is successful, a foundation is laid, not only for low, stable inflation in line with the target and the riksbank ’ s statutory objective, but also for a stable long - term growth of output and employment. seen from this angle, low inflation, besides being our objective, is accordingly a means of trying to achieve a stable economic development in general. that is something which should be underscored. inflation prospects in an analysis of the situation in the run up to the next inflation report, due to be published on 7 december, the following can be noted : • the price trend to date is approximately in line with the forecast that was presented in the october report. • as expected, there have been signals that international economic activity is tending to become somewhat slacker. the pattern is clearest in the united states but even some slowing of growth in europe seems likely in the coming years. • in sweden, too, there are indications that activity has become somewhat calmer. both households and firms