on more employees. using the same reasoning, unemployment would therefore rise if inflation was pushed down by tightening monetary policy. it is this relationship that is usually described with the aid of what is known as the short - term phillips curve. some of the criticism aimed at monetary policy in recent years appears to be based on the assumption that there is a clear - cut long - term relationship between inflation and unemployment. however, it is not possible to buy lower unemployment in the longer term by allowing inflation to rise. sooner or later wage - earners will require compensation for the higher inflation by raising their wage demands. as prices and wages rise, the stimulating effect of monetary policy will wane. demand will fall again and employment will decline. in the long term, unemployment will return to its long - term equilibrium level. a systematic, expansionary monetary policy would only have the consequence that inflation and inflation expectations would soar. this correlation is usually illustrated with the aid of the so - called long - term phillips curve. there is currently a broad consensus on this, both in central bank circles and the academic world. in my opinion, it is therefore not possible to claim that an economic policy that aims for low and stable inflation would in itself lead to higher unemployment. another part of the criticism is based on the assumption that it is not possible to buy lower unemployment by pushing up inflation, although there is instead apparently an assumption that if only the riksbank would ensure that inflation remains at 2 per cent, then unemployment would stabilise around its long - term equilibrium level. in practice, however, there is no such simple relationship between inflation and unemployment. firstly, unemployment is affected by a number of factors other than inflation, most of which have nothing to do with monetary policy, such as productivity changes, changes in regulatory systems and various shocks that regularly impact on the economy. similarly, inflation is affected not only by developments in the labour market, but by many other factors. empirical studies have shown that unemployment “ explains ” a relatively small percentage of total inflation. this means that inflation developments are largely “ explained ” by other factors than unemployment. secondly, it has proved very difficult to assess what is a long - term equilibrium level for unemployment and moreover that this also varies over time. one conclusion of this is that even if the riksbank were to always succeed in holding inflation at the target, this would be no guarantee that unemployment would be low and stable. unemployment is instead determined in the long run by how well

is important to give a detailed report of when such factors are taken into account. this is a strategy the riksbank follows. so far, the riksbank has not found reason to take account of what happens beyond the normal forecast horizon when formulating its monetary policy, although it does normally produce surveys of the economy for longer periods. however, i have argued on several occasions in 1999 and 2000 that there was reason to raise the instrumental rate, taking into account the effects in a longer term perspective. nevertheless, asset prices should not be included in the formulation of monetary policy targets. there is otherwise a risk that the central bank would counteract adjustments that were fundamentally motivated. this would reduce the efficiency of the resource allocation and probably subdue growth. other measures in addition to price stability, most central banks have a responsibility for financial stability. according to a narrow definition, financial stability is equal to a lack of crises in systemically - important banks. the banks have important functions with regard to the payment system and the supply of capital. it is easy to see that without an efficient payment system and capital supply the economy would be unable to function. monetary policy would have no effect in this situation. large shocks to the functioning of the financial system would also reduce the effectiveness of monetary policy, as the transmission mechanism is affected by the efficiency of the capital supply and the mediation of payments. the fact that there are close links between the central banks'two tasks becomes particularly evident when the effects of financial bubbles are discussed. an important part of the process leading up to large imbalances is credit granting by the banks. the fact that households and companies demand loans for increased consumption and investment when asset prices are rising is one thing, but it also requires that the banks increase their supply of loans. if the banks have well - developed risk systems, and rules and supervision are designed to motivate the banks to utilise them, the risk of exaggerated lending will be reduced. the way that capital adequacy rules are designed and applied is of great significance. the new capital adequacy rules, basel 2, are aimed at reflecting to a greater extent than now the risks the banks actually take. however, valuating credit risks over a whole economic cycle is very difficult. the indications are that both internal credit risk models and credit rating agencies tend to underestimate credit risks during an upturn in economic activity and to overestimate them during a downturn. there is thus a risk that