the economy. another similarity is the medium - term perspective rather than short - term activism. this in turn calls for a forward - looking perspective when the instrumental rate is set. a further resemblance is that in the riksbank ’ s strategy, monetary policy reacts systematically, though neither automatically nor mechanically ; this helps households and firms to base their expectations of inflation on a monetary policy that is predictable. we have followed our rule of action relatively closely, as is evident from diagram 1. 1. actual and estimated repo rate estimates with a simple forecast - based rule it = 1. 29 + 0. 66it - 1 + 0. 50 ( πft, 1 – 2 ) + 0. 26 ( πft, 2 – 2 ) + et source : the riksbank diagram 1, published in our latest inflation report, shows the actual path of the repo rate and estimations obtained with a simple forecast - based rule. it seems that on the whole, our actions can be explained fairly well by applying an equation based on the riksbank ’ s own series of forecasts of inflation one to two years ahead plus a term for the repo rate ’ s “ inertia ”. considering the rule ’ s simplicity, the deviations from it must be said to be small. the diagram accordingly shows that the riksbank ’ s actions have been reasonably systematic and based on the bank ’ s inflation forecasts. it is, of course, too early for a more thorough evaluation of explicit inflation targeting regimes compared with other monetary policy strategies. it is also the case that taylor rules, albeit in a somewhat modified form, likewise give comparatively good explanations for a number of central banks that have not explicitly adopted an inflation target, for example deutsche bundesbank and the u. s. federal reserve. thus, there are similarities between the strategies of these central banks and inflation targeting regimes. if the differences are greater rhetorically than in practice, it is therefore difficult to establish that one of the arrangements has performed better or worse than the others. diagram 2 presents the variations in growth and inflation for a number of industrialised countries in two periods. one is the years from 1970 to 1990, when central bank policy – except in germany and switzerland – tended to concentrate excessively on stabilising employment and demand instead of aiming to maintain price stability in the medium term. in a majority of these countries the transition to a stability - oriented monetary policy had at least not been completed. by the time

in numerous cases. the head of the us federal reserve has labelled it “ irrational exuberance ”, a phrase that is now a byword. a bubble will burst sooner or later. the precipitating factors vary but the event as such is simply a matter of time. the collapse in sweden began in 1991. share prices were already declining and property prices soon followed suit. the real economy is liable to be affected by falling asset prices, just as it is when asset prices rise. households perceive a loss of wealth that prompts them to restrain their consumption. another effect comes from the interaction of the credit market and the balance sheets of households and firms : when asset prices and their value as collateral fall, creditors become less willing to provide loans. in addition, falling asset prices may make banks generally less inclined to provide credit, so that even profitable projects suffer. this can ultimately paralyse the supply of credit and lead to the total collapse of the financial system. while sweden can be said to have avoided a financial crisis in that sense, both the wealth and the balance - sheet effects probably contributed to the course of the worst economic recession here since the 1930s. demand in general fell, financial saving rose and credit was rapidly repaid. the steep reduction of the loan stock in the first half of the 1990s is evident from diagram 1. however, a severe bank crisis was only one of the factors that hit the swedish economy. at times in the early - 1990s there was also heavy pressure on the krona. in november 1992 the riksbank was finally obliged to change to a floating exchange rate. one of several causes of the exchange rate turbulence was the short - term external liabilities that had accumulated in the late - 1980s. in that period, households and firms had borrowed the equivalent of around sek300 billion in foreign currency through the swedish bank system ( diagram 2 ). that corresponded to around 20 % of gdp. i mentioned earlier that borrowing from banks rose quite remarkably in the second half of the 1980s ; about 20 % of this took the form of foreign - currency loans. much of the borrowing was short - term but the funds were not infrequently used for projects with a longer duration, such as property investment. all went well as long as the loans could be renewed and the banks were able to borrow the corresponding amounts in the international market. 2. banks ’ lending in foreign currency, sek billion it was not a classic run on the banks, with