asset prices are studied in the regular monetary policy analysis, as they affect, and are affected by, fluctuations in inflation and economic activity. higher asset prices lead, for instance, to positive wealth effects, which in turn affect households ’ choice between consumption and saving, and thereby total demand in the economy and inflation. on top of this, it is complicated to capture the risks in the usual forecast work as a result of large fluctuations in asset prices. for instance, it is difficult to quantify the risks linked to an unusually rapid increase in house prices and indebtedness over a long period of time. these risks may actually be beyond the normal forecast horizon, but nevertheless be so serious, if they were realised, that there is justification for taking them into account in some way. in recent years, house prices and household borrowing have increased rapidly, partly as a result of low interest rates. we have stated that we feel some concern that this development may go too far, with a risk of severe adjustments in the future. one risk is that a sharp brake in house prices could lead to households perceiving their debt burden to be too high, and that they would therefore quickly increase their saving. this could lead to a severe decline in demand in the economy and in inflation. in the considerations behind our decision on the interest rate at the beginning of the year, we considered these risks to be one reason for not postponing an increase by a few months - which i otherwise believe would have been fully possible given the forecasts we otherwise make and the precision of these forecasts. i would not like to claim that this is necessarily always the optimum means of managing this type of risk in monetary policy considerations. the relationship between credit volume and asset prices on the one hand and monetary policy and the real economy on the other hand has not yet been sufficiently mapped to be able to draw any clear policy conclusions. in addition, our experience of deregulated financial markets is still limited to a small number of economic cycles. at the same time, we cannot ignore the risks to future inflation and economic activity with which we believe that developments in the housing market are connected. as i said, the world will not come to an end in two years ’ time. the fact that we do not have any definite answers regarding the effects of a rapid credit boom in my opinion should not prevent us from acting in a manner that will at least not aggravate the risks. summary let me conclude by summarising my

as monetary policy is a blunt instrument and cannot affect, for instance, how growth and employment develop in the long term. in other words, the question has never been whether monetary policy should consider the real economy, but rather how this can best be done without neglecting the price stability objective. in practice, monetary policy takes the real economy into account in that we do not aim to bring inflation back on target as quickly as possible in every situation. when there is a deviation from target – which happens most of the time – our ambition is normally to return inflation to target within a time period of two years. one reason why we look ahead in this way is that monetary policy ’ s effects are exerted with a time lag. but the two - year horizon is also motivated by considerations to developments in the real economy. this creates some scope for trade offs in the inflation - targeting policy. let me explain. if we were only concerned with inflation, we would always want to bring inflation back on target as quickly as possible. on many occasions it would be possible to attain the target sooner than within two years. but we would then need to change the interest rate in larger stages and more often. this type of policy would risk leading to unwanted fluctuations in the real economy. this applies in particular to the situations where inflation has deviated from target as a result of supply shocks. these could be, for instance, sudden increases in companies ’ production costs due to soaring commodity prices and / or energy prices. the result could then be that inflation would rise above the target, while economic activity would be weak. the reverse can also occur - a fall in production costs could lead to inflation being lower than the target, while capacity utilisation was higher than is sustainable in the long term. if monetary policy were to aim at bringing inflation back on target as quickly as possible in these situations, it would further reinforce the fluctuations in the real economy. when economic developments are instead mainly driven by changes in demand, the conflict between the price stability target and the ambition to subdue fluctuations in the economy is not as clear. if, for instance, demand falls, the result will normally be that inflationary pressures also decline. an expansionary monetary policy can in this situation contribute to stabilising both inflation and activity in the real economy. there may then be justification for aiming to attain the inflation target within a shorter period than two years. of course, in practice it is not always easy to distinguish what shocks the economy