long - term potential output - in other words on how the gap between actual and potential output changes - as well as on the inflation expectations of different economic agents. the riksbank considers that 5 per cent growth in the coming years is compatible with low inflation, mainly because in general the economy has plenty of unutilised capacity. in other words the output gap, which is affected by, for example, the labour market situation, is not expected to close in the coming years. structural changes and increased competition in several fields suggest that the swedish economy ’ s inflation propensity has fallen. deregulation has been carried out in transport and communications, for instance, and to some extent in the food sector. eu membership has had positive effects for competition in sweden, partly via increased competition from imports. the new competition laws have also helped to strengthen competition. changes of this type, as everyone knows, are positive in that they pave the way for lower consumer prices. another consequence that is less evident and therefore worth underscoring is that, in so far as the changes affect the outlook for inflation, they can provide room for a somewhat less tight monetary stance. the continued fall in inflation expectations, to a level that for sweden is historically low, likewise suggests that inflationary pressure is subdued. agents in markets for labour, goods and money now count on inflation being in line with the riksbank ’ s inflation target in both the short and the medium term. increased confidence in the inflation target can of itself lower the inflation propensity. the rate of wage increases to date this year indicates that the parties in the labour market are beginning to act in line with the lower expectations ; the new wage settlements that have been concluded in 1997 show a downward shift in the rate of wage increases compared with 1996, towards levels that are more in line than before with the riksbank ’ s inflation target. the riksbank ’ s overall assessment is that in the coming two years the underlying rate of inflation will be between 1. 5 and 2 per cent. registered inflation, however, will rise by degrees with the disappearance of transitory effects that have pushed the cpi down in recent months. the registered rate will probably remain below the inflation target during 1997 and then move up towards two per cent in 1998. against this background, in the inflation report the riksbank considered that the monetary stance is well balanced. forecasting inflation a couple of years ahead is, as everyone appreciates, a very difficult

encourage investors to substitute lowyielding, safe assets for higher yielding, riskier assets – the “ search for yield ”. investors ( such as pension funds ) may make this substitution in the hope of attaining returns that match their commitments. the concept of a risk - taking channel was introduced by claudio borio and haibin zhu in “ capital regulation, risk - taking and monetary policy : a missing link in the transmission mechanism? ” bis working paper no. 268, 2008. bis central bankers ’ speeches alternatively, investors may be encouraged to take greater risks if they perceive that monetary policy is being used asymmetrically – that is, that the policy rate is reduced aggressively in the event of a sharp fall in asset prices but the policy rate is not used to address sharp increases in asset prices. another, more indirect channel, is formed by a feedback loop that amplifies asset price increases and causes banks to increase their holdings of risky assets. it is argued that financial institutions target leverage ratios that are constant ( commercial banks ) or procyclical ( investment banks ). therefore, an increase in the value of financial assets causes financial institutions to increase their balance sheets to maintain their target leverage ratios, which puts further upward pressure on asset prices. this also causes an increase in the level of risk in the financial system because the availability of safe investments is limited, so banks must move up the risk spectrum towards risky borrowers when they increase their balance sheets. macroprudential policy instruments can affect price stability macroprudential policy instruments can also have an effect on price stability. this can be illustrated using a highly stylised view of the monetary policy transmission mechanism : this equation describes how banks ’ lending rates are a function of the central bank ’ s policy rate plus an interest rate margin or spread. the interest rate margin ( ) is a function of the compensation taken by banks for factors such as administrative costs, capital costs, risk premiums and the banks ’ profit margins. the failure of macroprudential policy can affect the transmission mechanism of monetary policy by affecting the interest rate margin. for example, during a crisis, the relationship between the policy rate and market rates may diverge as market rates are increasingly governed by uncertainty over credit risk. but macroprudential policy can also affect the transmission mechanism outside of a crisis. this is because the bank lending rate is also a function of financial regulations ( placed on banks to enhance financial stability and consumer protection ), as these tend to increase