and reduced confidence in the central bank, and also for its monetary policy. on the other hand, if the definition is too general it will be impossible for parliament and others to evaluate how the central bank manages the task. maybe, there could be a hierarchy of targets – a broad one in the legislation and a narrower one, which may be adapted to the actual situation, which is then communicated by the central bank to the general public on a regular basis. this is similar to monetary policy practices. a related issue is the one on central bank independence. our present independence refers to the conduct of monetary policy. do we need an extension so that it also covers our work on financial stability? this question has not been fully analysed yet, but i think that the politicians would hesitate to transfer such powers unless central bankers can find really strong arguments. there are several arguments for conducting financial stability work in the central bank such as : – there is a clear link to monetary policy ; – central banks usually run the large value payment system which is an important nexus in the financial system ; – central banks may provide exceptional liquidity assistance – ela – to problem banks, but must then understand the implications for the system as such ; much of the stability work is crisis - oriented – both the precautionary work and that dealing with actual crisis situations. the riksbank participates in many international fora that promote stronger frameworks to prevent or at least to manage crises. the recent global crisis led to a number of conclusions showing that we need a broader framework in which to analyse financial stability and deal with problem situations. for instance : – not only banks will destabilise the system ; – systemically - important institutions pose even greater challenges than we thought ; – liquidity developments must be closely monitored ; there are clear linkages between submarkets and also between jurisdictions. the experience gained during the crisis leads to some specific challenges for central banks : – central banks must maintain a sufficient capacity to provide liquidity to meet sudden needs, but at the same time we must maintain strong incentives to avoid the banks and markets relying on central bank funding rather than approaching their normal channels. – we must review our framework for extending ela ; – our analysis needs to focus more than before on liquidity developments in major cross - border bank groups. where such groups exist, the home country of the parent bank is vulnerable to threats to financial stability in other countries, both where the funding markets are located and those where

accelerated against the background of increases in redevelopment projects and steady demand for office space. these developments may also cause activity of both firms and financial institutions to accelerate. if greater assertiveness should be based on optimistic assumptions regarding future sales and profits, financing costs, foreign exchange rates, and asset prices, the result could well be a misallocation of resources in the long run as agents become over - extended in financial markets or pour funds and other resources into inefficient economic activities. such developments may push up economic growth in the short run, but lead to later downward adjustments and hamper the sustainability of economic growth. iv. sensitivity of prices to changes in the output gap these upside and downside risks to the outlook for economic activity may affect prices should they materialize, but there are also upside and downside risks unique to price developments that could cause prices to deviate from the projection. the sensitivity of prices to changes in the output gap has been declining in recent years. this tendency has been taken into account in our projection for prices mentioned earlier, but the degree of decline is uncertain and the sensitivity of prices may turn out to be lower than assumed in the projection. if factors strongly restraining wage growth remain despite prolonged economic expansion, downward pressure on prices from labor costs would persist. moreover, if the positive influence of the strength in the corporate sector feeds through into the household sector more slowly than expected due to sluggish wage growth, supply and demand conditions for consumer goods and services may not improve as much as the output gap suggests. in such a situation, prices may not be responsive to the improvement in the economic situation. on the other hand, if the economy continues to grow at a pace exceeding its potential through fiscal 2008, it is likely that the utilization of resources such as labor and production capacity will rise further and the output gap will show further tightening of supply and demand conditions. inflation expectations, which have been low and stable, may rise with higher resource utilization, particularly in labor, along with increased prices of crude oil and other international commodities. moreover, although firms are likely to continue to restrain labor costs, they may change their attitude with the aim of hiring or retaining skilled workers. these potential changes would exert upward pressure on prices. v. conduct of monetary policy next, i would like to elaborate on the future conduct of monetary policy, keeping in mind the projection for economic activity and prices and the possibility that they may deviate from the projection. the bank assesses the economic