world war two, the idea of returning to a less restricted financial system failed to catch on. it was not until the 1980s that deregulation reached sweden, after starting somewhat earlier in many other industrialised countries, including the united states. a free financial system is needed in order to promote the development of new technology and a genuine social transformation. but it does also entail a number of risks. it was the new technology that provided the driving force behind companies such as worldcom and enron, just as it was the supply of capital from the deregulated financial system that enabled them to grow as they did. but these were not the only enterprises that exploited the new technology and benefited from the free capital market. it was the euphoria and even hysteria about many companies that led to the formation of a stock - market bubble. according to some measurements, the average levels that share prices reached in relation to more fundamental values in the late 1990s were higher than ever before. so it is hardly surprising that the falling trend in recent years has involved such large losses around the world. share prices tend to return sooner or later to values that are a better reflection of fundamental factors. a closer look at the recent stock - market bubble reveals a number of more specific features that call for special reflection. it looks as though share prices for it and technology oriented companies were driven primarily by new and rather inexperienced investors, cheered on by managements in need of capital to cover current spending as well as by analysts from banks and investment companies that handled the share issues. media around the world also seem to have lent their voice to this tendency. seen in this wider perspective, events in recent years raise a number of questions that i now want to consider briefly. how should we view financial bubbles, what causes them and what can we do about them? what drove the latest bubble, what can we learn from it and what is needed more generally to make stock markets function more efficient? nothing new about periods of undue optimism one important lesson is that in a deregulated world, waves of excessive due optimism can arise and result in pronounced financial cycles. in the 1990s there were several periods of financial turbulence. one was sweden ’ s own bank and currency crisis about a decade ago. at the same time there were problems in other countries and turbulence in the european exchange rate mechanism ( erm ). that was followed by the crises in asia and mexico, the problems with the major hedge fund long term capital management, russia ’

rate than we had forecast in june. however, this is partly counteracted by the fact that the underlying productivity growth in the economy may need some upward revision. in the forecast of inflation that we will be presenting in the inflation report to be published next week, we will no longer be basing our forecast on the assumption of an unchanged repo rate. the point of departure instead is the policy rate expected by the market in the period ahead, as reflected in implied forward interest rates. with this point of departure - and taking into account the different risks that we envisage - it is reasonable to believe that inflation one to two years ahead will approach our inflation target of two per cent. when the executive board convenes to discuss monetary policy on wednesday next week, future inflation prospects will of course will the decisive factor for our decision. it is likely that we also will have a discussion regarding how we should view the continued rise in house prices. personally, i do not think that there is any immediate hurry to raise the repo rate, something that the executive board also communicated in august. but it is clear nonetheless that this is the next natural step if the current outlook remains unchanged. when it may become appropriate to modify the currently very expansionary monetary policy depends, of course, as usual primarily on economic developments in the period ahead and on the assessment of future inflation. 4 / 4