target was not self - evident. real price stability could be perceived as the inflation rate being zero per cent, but neither we nor any other country has chosen such a target. one argument is that it is good to have some margin as there is a risk that cpi overestimates inflation. for instance, it is difficult to exactly measure price increases as a result of better quality, which is thus not inflation. another argument is that it is often difficult in practice to implement nominal reductions in prices and particularly wages. some measure of inflation may therefore simplify necessary adjustments in relative wages and prices. at the same time, there have seldom or never been attempts to stabilise inflation at a level much higher than 2 per cent. this may be because this does not sufficiently anchor inflation expectations. experiences from sweden and other countries indicate that low, stable inflation is an important condition for favourable economic growth and that the work on maintaining low, stable inflation is made easier if the central bank can act independently. this is why the riksbank, like many other central banks, has been given greater independence and an inflation target. if the central bank is not allowed to independently formulate monetary policy there may be political pressure to conduct monetary policy that aims to achieve other objectives. how does the riksbank influence inflation? the tool the riksbank has at its disposal for steering inflation is the repo rate. this is the interest rate the banks pay to borrow money from us. the objective of changes in the repo rate is to influence demand in the economy and thereby price developments. when the riksbank alters the repo rate, there is an effect on total demand and ultimately also inflation through various channels within the economy. these channels are the cost of borrowing, incentives to save and wealth, as well as exchange rate fluctuations that affect imported inflation, exports, imports and capital flows. in addition, there is an effect on inflation expectations. it takes some time for an interest rate change to have an effect through these channels. the monetary policy decisions must therefore be based on an assessment of future inflation. flexibility thanks to credibility conducting monetary policy is not the same as flying a familiar, well - tuned aircraft. the repo rate is unfortunately a blunt instrument with regard to steering inflation, even a couple of years ahead. what monetary policy can do is to ensure an inflation rate that is over a number of years in line with the target and to contribute to reducing fluctuations in the real and financial economy. when

path so that the forecast of inflation and resource utilization “ looks good. ” by a forecast that looks good i mean a forecast either in which inflation is already on target and resource utilization is already normal, or in which inflation is approaching the target and resource utilization is approaching a normal level at an appropriate pace. more precisely, it means a forecast for inflation and resource utilization that as effectively as possible stabilizes inflation around the inflation target and resource utilization around its normal level. in the event of conflicting objectives, it achieves a reasonable compromise between the stability of inflation and the stability of resource utilization. 1 different central banks express this in slightly different words. the riksbank has often used the term “ well - balanced ” monetary policy. 2 the forecasts of inflation and the real economy are then conditional on the central bank ’ s view of the transmission mechanism, an estimate of the current state of the economy and a forecast of important exogenous variables. the central bank uses all relevant information that has an impact on the forecast of inflation and the real economy. in this framework, the central bank takes financial conditions such as credit growth, asset prices, imbalances, potential bubbles and so on into account only to the extent that they have an impact on the forecast of inflation and resource utilization. inflation and resource utilization are target variables here, that is, variables that are arguments of the central bank ’ s loss function. hence, financial conditions are not target variables. instead, they are only indicators, as they provide information about the state of the economy, the transmission mechanism and exogenous shocks to the central bank. financial conditions then affect policy rates only to the extent that they have an impact on the forecast of inflation and resource utilization. 3 3. financial stability as a rarely binding constraint – a pre - crisis view what is the role of financial stability in a pre - crisis view of flexible inflation targeting? maintaining financial stability, including a well - functioning payment system, is, explicitly or implicitly, an important objective for central banks. in my overview of best - practice monetary policy in svensson ( 2002 ), long before the crisis but during an ongoing debate about monetary policy and asset prices, i briefly discussed how this objective can be reconciled with flexible inflation targeting, how conflicts can arise and how they could be handled. 4 one question is whether financial stability belongs in the loss function for the central bank, together with inflation and resource utilization. i argued that a good way of handling this additional objective is