left idle. this is usually referred to as providing the economy with a nominal anchor. when households and enterprises can base their economic decisions on low and stable inflation, this provides an important foundation for higher activity and welfare over time. as long as there is confidence that inflation will remain low and stable, monetary policy can contribute to smoothing fluctuations in output and employment. when the economy is exposed to shocks, such as a financial crisis or a fall in oil prices, monetary policy can respond rapidly. sufficiently flexible inflation targeting could help ensure that lower employment levels do not persist over the long term following a downturn. this can reduce the risk of unemployment becoming entrenched at a high level. the probability of a pronounced downturn in the economy has been shown to increase after periods of rapid asset price inflation and debt growth. monetary policy can also to some extent contribute to high and stable output and employment by giving weight to counteracting the buildup of financial imbalances. however, monetary policy must not be overburdened. if norges bank pursues objectives it does not have the instruments to fulfil, confidence in monetary policy may be eroded. the regulation and supervision of financial institutions must be the primary means of addressing shocks to the financial system. employment levels over time are determined by structural conditions, such as the functioning of the labour market, the tax and social security system and the wage formation process. in norway, a well - functioning wage formation process has enabled unemployment to remain low while wage growth has remained moderate. the new regulation underpins norges bank ’ s flexible approach to inflation targeting. in the conduct of monetary policy, substantial weight will continue to be given to the real economy. in this context, whether the inflation target is 2. 5 percent or 2 percent is less important. at 2 percent, the inflation target is now at the same level as that of most of norway ’ s trading partners. the reduction of the target will not in itself significantly affect the short - term interest rate outlook. never before have global interest rates been as low for such a long period. growth abroad has now picked up, and there are prospects of a gradual interest rate increase among norway ’ s 3 / 4 bis central bankers'speeches trading partners. the outlook is also brighter in norway. in the two years since the cyclical trough was reached, growth has gained a firm footing and the unemployment rate has declined. the outlook suggests that it will soon be appropriate to raise the key policy rate – and

interest rate in the best case. by influencing inflation expectations more directly, the real interest rate can be reduced by several percentage points. monetary policy alternatives with a zero interest rate bound : concluding comments as both japan and the united states now have a zero interest rate and several other countries are now cutting their interest rates close to zero, it is natural that monetary policy with a zero interest rate should be increasingly a subject for discussion and debate. the most recent monetary policy report contains an article on monetary policy with a zero interest rate, and there is also an alternative scenario in chapter 2 assuming weaker real economic development and a repo rate path that is at zero during part of the forecast period. although it is not particularly likely that we in sweden will be subjected to a strongly binding zero lower bound for the interest rate, it is wise to be prepared for this eventuality and to have carefully considered the monetary policy alternatives that would then be available, and which of these would be appropriate, depending on how serious the zero lower bound was. a zero lower bound on the interest rate means that the real interest rate is still too high to sufficiently stimulate the real economy, despite the policy rate being cut to zero. it is the real market rate that is important in the real economy, and this corresponds to the policy rate plus a spread arising due to various risk and liquidity premia, minus expected inflation. although the policy rate is zero, nominal market rates are positive as a result of the spread. the various measures taken by central banks and other public authorities during the financial crisis to ensure that the financial markets function more efficiently and that the spreads decline thus fulfil a function that is at least as important, even if the repo rate is at zero. it is reasonable to suppose, however, that their stimulating effect is much smaller than the effect a central bank can achieve with measures that focus on inflation expectations. the major danger with a zero lower bound for the interest rate is that inflation expectations will be too low and even negative, and that the real interest rate will thus become too high. it is thus necessary to keep watch on inflation expectations, to counteract expectations of falling inflation, and preferably to create expectations of higher inflation. in this type of situation it may be desirable to create expectations that actually exceed the inflation target. the riksbank ’ s current regime, with a credible inflation target and the publication of forecasts, including their motivation, for inflation, the real economy and the repo rate,