inflation? the riksbank act states that monetary policy ’ s objective is to maintain price stability. partly in order to make the policy intelligible and open for assessment, the riksbank has decided that inflation - measured as the annual change in the consumer price index ( cpi ) - is to be held at 2 %, with a tolerance interval of ±1 percentage point. motivating low inflation is not difficult. a great deal has been written on the subject. but perhaps it will suffice to recall the swedish experience in the 1970s and 1980s. the high and widely fluctuating rate of inflation had clear negative effects on our economy. productivity gains and investment growth in that period were low. sharply rising prices led to an arbitrary redistribution of income and wealth. in order to rectify the corporate sector ’ s competitive position, the value of our currency had to be written down on a number of occasions. bit by bit, however, more and more people, regardless of which political party they supported, realised that this economic policy could not be sustained. so in the early 1990s, sweden finally joined the growing number of countries that had chosen to re - focus their policy on low inflation. but while it is not difficult to advocate low, stable inflation, it is less easy to argue that just 2 % is the appropriate rate. when the inflation target was adopted in 1992, it was noted that this was approximately the level of ambition that important countries had chosen. moreover, inflation was currently around that level when the decision was made. alan greenspan has argued that inflation should be so low that people generally do not give it a thought when making economic decisions. that points to 2 % as a reasonable level. there are some objections, however. some argue that an inflation target ought to be higher. one reason has to do with the downward rigidity of nominal wages. we know from experience that wages rise, sometimes so much that they generate inflation. downward wage adjustments are less frequent. seen from this angle, inflation might be regarded as a smooth way of achieving necessary adjustments to real business costs. another risk, according to some observers, is that an unduly low inflation target leaves too small a margin for monetary policy. the economy is liable to land in a situation where the central bank is no longer in a position to influence the development of prices by pushing the real interest rate down. it simply is not possible to reduce the interest rate below zero per cent. as i see it, the

be decisive factors in determining how efficiently a crisis in a cross - border institution is handled. it is also important to hold joint crisis exercises, using different scenarios. we can also observe that the memorandums of understanding in the field of financial crisis management, which have been drawn up between authorities in europe in recent years have proved to be too vague. in future, therefore, we need to have more concrete and binding arrangements. one complicated and important question is how the costs should be distributed when a crisis spreads to several countries. differences in regulation and supervision also complicate the crisis management. greater harmonisation is in actual fact an important condition for both crisis management and crisis prevention work. as a result of the crisis, the eu has begun to look into how its framework for supervision can be improved. my view is that after the crisis it is both essential and possible to take a step towards better joint supervision in europe. but although the supervision issue is important, the systems for deposit guarantees and crisis management must be designed to function when needed, not merely within individual countries, but also between countries. this has not always been the case during the current crisis. monetary policy and the build - up of risks does monetary policy have a role to play in preventing a financial crisis? this has long been a controversial issue, where economists have held differing opinions. however, the financial crisis has undoubtedly given us experiences we should make use of. the predominant view has probably been that one should not use the interest rate to try to counteract a credit boom that is expressed in rapid price increases on houses or financial assets. this view is based on the fact that it is difficult or almost impossible for a central bank to determine whether a credit boom has its base in the real economy or whether it is due to unrealistic expectations of continuing price increases. instead of trying to deliberately burst the bubble, one should use monetary policy to counteract the negative effects that may result if it bursts. the disadvantage of this reasoning is that the negative effects when the bubble bursts may be fairly substantial – which to a large degree is illustrated by the current financial crisis. it is also difficult to deny that the long period of low interest rates in the world prior to the crisis may have contributed to an unreasonably high build - up of credit. with hindsight, this view does not appear so controversial. does this mean that monetary policy can and should be used to prevent financial crises? i believe that monetary policy can be a complement to other