flexible inflation targeting the textbook account of a flexible inflation targeting regime explains that when interest rates are set to bringing inflation back to the target, consideration is also given to the effects on the real economy ; an appropriate balance between inflation and real variability is sought, which implies that an immediate reversal to the target is not an end in itself. textbook accounts of flexible inflation targeting typically give the following answer to the question of how asset prices should be factored into the monetary policy decision : monetary policy should respond to changes in asset prices to the extent that they affect the inflation and growth forecasts. thus, there is no independent role for e. g. rapidly rising house prices. their effect on the monetary policy decision should come only through their effect on the inflation and growth forecasts. this recommendation, and the assumptions on which it is based, is something i will comment more on, below. leaning against the wind another view often put forward is that a central bank can bring about better outcomes for inflation and output by reacting to rapidly rising asset prices, over and above their implications for inflation and growth. in short, there are two arguments for this : ( i ) engaging in such behaviour – let ’ s call it “ leaning against the wind ” – in situations when an asset price is changing due to non - fundamentals can dampen the effects of the unmotivated price change on the real economy and thereby prevent an inefficient allocation of resources ; ( ii ) if the market knows that the central bank engages in “ leaning against the wind ” activities the probability will fall of non - fundamental price changes arising in the first place. the key issue here is, of course, identifying price changes that are driven by nonfundamentals. this problem cannot be overly emphasized. but difficult or not, it is an issue that central banks cannot ignore. if prices of houses or other assets are partly driven by factors that are hard to explain and that are believed to give rise to inefficient allocations and risks of large fluctuations in real economic activity and inflation, such events will, in one way or another, find their way into our thinking about monetary policy. extending the forecasting horizon in practice, most inflation targeting central banks have chosen to adopt forecast horizons of two to three years, at least in external communication and official documents. in this environment, the idea that a central bank can need to extend the horizon over which it constructs inflation and output forecasts is one that has been heard

if you want to subsidize some activities, regions or parts of the population you should at least do it in a transparent manner, so the costs become explicit in the fiscal budget, implying an open debate and decision by the parliament or government. our regulation was also erroneous in trying to micro - manage the banks in their own business decisions on lending rates, fees, liquidity management and so on. experiences from many countries have clearly shown that the banks themselves, guided by market forces make better decisions than outside parties. finally, the restrictions on the capital flows were wrong because they hid the signals from swedish and overseas investors and other actors and also because they led to an unsound protection of the swedish financial system and markets. with hindsight it is easy to see these shortcomings but when they were in force, the regulations represented the flavour of the day. as i have shown, there are forms of regulation which are harmful and should be terminated. should there be any regulation at all? yes, i think so. let me explain why by using the example of banks, which in most countries dominate the financial sector. banks offer several unique and valuable services to society. as i noted in the beginning of my presentation, they receive deposits and transform them into lending. they assume, distribute and transform various risks. they facilitate payment transactions by the use of accounts in other banks and payment systems. however, performing these activities makes banks vulnerable, in particular receiving short - term deposits and transferring them into long - term loans. at worst, banks may fail and destabilize the whole financial sector and even the whole economy. to avoid such calamities from happening, society is willing, under certain specified circumstances, to rescue banks from failure by providing exceptional lending from the central bank or solidity enhancements from the government. depositors may be protected by a deposit insurance scheme. but the willingness of the authorities to assist the banks and their customers must be matched by regulation and monitoring to ensure that the bank owners and others do not use, or i might say “ abuse ”, the possibility of public support to further their own purposes. hence, there must be some regulation and supervision to make sure that banks behave in ways which are consistent with the overarching goals of society, such as financial stability and consumer protection. regulation must also provide the necessary incentives for banks to act prudently and in fair competition with other banks and other financial institutions. an adequate level of domestic regulation is