not been debated as much as the question of how to act prior to this. leaning against the wind – act sooner, not just later … this debate has previously been somewhat “ polarised ” between two stances – to “ lean against the wind ” or to “ clean up afterwards ”. the former stance involves the central bank raising its policy rate if property prices and lending increase at an alarming rate, even if an interest rate increase is not obviously justified on the basis of the forecasts for the real economy and inflation. one usually says that the central bank should “ lean against the wind ”. the basic idea is that keeping the policy rate higher than it would otherwise have been contributes to holding back the rise in property prices and ensuring that the fall in prices that comes sooner or later is much milder. a more balanced development in property prices also leads to more stable developments in the real economy and inflation. although growth may be slightly lower in the upturn phase, there is on the other hand less risk that property prices will fall dramatically later on, which could contribute to a severe downturn. this is in some ways similar to an insurance policy : by accepting slightly weaker growth in the short term, one reduces the risk of much more negative developments further ahead. however, the strategy of “ leaning against the wind ” is not entirely without problems, even if it may sound fairly simple. many economists have criticised this strategy. the main critics considered, at least prior to the crisis, that although it may indeed involve an imbalance, the best strategy was for the central bank to confine itself to “ cleaning up afterwards ” once the bubble had actually burst. in their view, “ leaning against the wind ” often would not lead to more stable developments, but instead risks amplifying fluctuations. three main arguments have been raised by critics against the policy of “ leaning against the wind ”. difficult to identify a bubble and to do so in time? to begin with, it must be possible to identify the imbalance or potential bubble and to do so at a sufficiently early stage. the critics claim that this is very difficult and they often use the term “ bursting bubbles ” when talking about monetary policy and asset prices. the idea of bursting a bubble has much more dramatic associations than the expression “ leaning against the wind ”. if the developments that are judged to be unbalanced are actually justified by the fundamental driving forces, then a higher interest rate would curb growth unnecessarily. it could

eva srejber : competition and growth speech by ms eva srejber, second deputy governor of the sveriges riksbank, to the swedish taxpayers association, stockholm, 21 september 2001. * * * according to the sveriges riksbank act, the objective of monetary policy is to safeguard the value of money. the riksbank has specified this in its inflation target, i. e. that cpi inflation should amount to 2 per cent with a deviation interval of plus / minus one percentage point. this means that when we formulate monetary policy, we must take into account changes in a number of areas that affect price trends, either directly or indirectly. i thought that i would comment on one of these areas today, namely competition, and its effects on potential growth. this is an area that we are forced to consider when we analyse the economy, as it is essential to assess potential growth when shaping monetary policy. however, before i begin, i should like to make the point that i will not be discussing the current monetary policy situation. growth is a constant central feature of monetary policy discussions, as demand in the economy in relation to production capacity is crucial for determining whether inflationary bottlenecks arise or whether we will underutilise the production potential. it is sometimes claimed that maintaining price stability limits growth. this is incorrect. the limits are determined by the potential growth rate. we must take into account the potential growth rate, even if we do not influence this by means of monetary policy once price stability has been established. correspondingly, we must take into account changes in conditions for competition, as such changes can influence inflationary trends both directly and indirectly. any measures taken to strengthen potential growth come under other economic policy than monetary policy. such measures can include avoiding limits to competition that would lead to a poorer allocation of resources. the swedish economy was showing very favourable growth until last winter. today, now that growth has slowed down, it may be worthwhile to remember that it is from this starting point that growth was subdued. we can put it even further into perspective by comparing with the situation in the beginning of the 1990s. conditions then were very difficult and characterised by rising unemployment, a high inflation rate and poor public finances. the situation was so strained that the government turned to the academic world for advice and a report from the economics commission was delivered in spring 1993. this report, which is usually referred to as the lindbeck commission, contained no less than 113