prices. house prices vary in response to changing economic conditions, one of them being the stance of monetary policy. in sweden, as in many other countries, house prices have increased in an environment characterized by strong macroeconomic conditions, rising disposable incomes and increasingly sophisticated financial markets. in this environment it is impossible to pin - point an appropriate rate of change in house prices. but policy makers always have to take decisions under a high degree of uncertainty. concluding remarks in conclusion, let me say that we have tried to be open and honest about the uncertainties surrounding the effects of house price developments on the rest of the economy and the appropriate monetary policy response. we have, in fact, been open about our own uncertainties and the differences in opinion, albeit small, that have arisen at times. this may have given rise to “ confusion about the confusion ”. but one could also say this comes with transparency – outside observers were very aware of the discussions that were being held and the uncertainties involved. inflation targeting so far has proved to be a successful way of conducting monetary policy, but there are unresolved issues and one concerns the treatment of house and other asset prices ; it has been hard to formally fit asset price developments into the frameworks researchers and central banks use when they study inflation targeting. the models currently available to us and other policy makers, while indispensable as tools for organizing our thoughts concerning difficult matters, are incomplete representations of complex economies and cannot be the sole input into our analysis. thus, while the academic community and researchers at central banks – including sveriges riksbank – continue their efforts to formulate models that combine firm founding in economic theory with good empirical properties, policy makers have to use judgement and take into account those relationships that history and experience suggest are of importance. in my view it is well worth keeping an eye on house prices and other asset prices and passing judgement on the risks that their developments may give rise to. if the probability of very negative outcomes can be reduced ex ante i believe this to be a good thing and a better solution compared to picking up the pieces ex post.

flexible inflation targeting the textbook account of a flexible inflation targeting regime explains that when interest rates are set to bringing inflation back to the target, consideration is also given to the effects on the real economy ; an appropriate balance between inflation and real variability is sought, which implies that an immediate reversal to the target is not an end in itself. textbook accounts of flexible inflation targeting typically give the following answer to the question of how asset prices should be factored into the monetary policy decision : monetary policy should respond to changes in asset prices to the extent that they affect the inflation and growth forecasts. thus, there is no independent role for e. g. rapidly rising house prices. their effect on the monetary policy decision should come only through their effect on the inflation and growth forecasts. this recommendation, and the assumptions on which it is based, is something i will comment more on, below. leaning against the wind another view often put forward is that a central bank can bring about better outcomes for inflation and output by reacting to rapidly rising asset prices, over and above their implications for inflation and growth. in short, there are two arguments for this : ( i ) engaging in such behaviour – let ’ s call it “ leaning against the wind ” – in situations when an asset price is changing due to non - fundamentals can dampen the effects of the unmotivated price change on the real economy and thereby prevent an inefficient allocation of resources ; ( ii ) if the market knows that the central bank engages in “ leaning against the wind ” activities the probability will fall of non - fundamental price changes arising in the first place. the key issue here is, of course, identifying price changes that are driven by nonfundamentals. this problem cannot be overly emphasized. but difficult or not, it is an issue that central banks cannot ignore. if prices of houses or other assets are partly driven by factors that are hard to explain and that are believed to give rise to inefficient allocations and risks of large fluctuations in real economic activity and inflation, such events will, in one way or another, find their way into our thinking about monetary policy. extending the forecasting horizon in practice, most inflation targeting central banks have chosen to adopt forecast horizons of two to three years, at least in external communication and official documents. in this environment, the idea that a central bank can need to extend the horizon over which it constructs inflation and output forecasts is one that has been heard