policy might have a role to play. perhaps the main reason why it is normally not advisable to try to influence asset prices is that it is extremely difficult, if not impossible, to be sure when a bubble has formed and when rising prices are due to improvements in underlying economic factors. the appropriate monetary policy must be determined by the fundamental causes of the rise in asset prices. let us assume, for example, that a rise in share prices reflects better prospects of higher future corporate profits as a result of faster underlying growth in productivity. in that case, the rise in prices is the result of an improvement in fundamental economic factors, which means that it is based on “ real ”, rather than psychological, causes. that being so, monetary tightening would not be a very good move and might in fact be counterproductive, since future inflation would probably actually be lower as a result of higher productive capacity in the economy due to the underlying growth in productivity. another reason why it is not usually a good idea to use monetary policy to take action against rises in asset prices is that even if you do succeed in identifying a bubble, it is probably very hard to burst it with such precision that you do not damage the financial markets and the rest of the economy in the process. therefore, the general view nowadays is that central banks should not try to use interest rate policy to control asset price trends by seeking to burst any bubbles that may form. the normal strategy is rather to seek, firmly and with the help of a great variety of instruments, to restore stability on the few occasions when asset markets collapse. inflation targets are an effective instrument according to many observers, the kind of monetary policy regime with declared inflation targets that is applied in sweden and other countries is a suitable instrument for dealing with the problems associated with fluctuating asset prices. one reason for this is that setting inflation targets means that monetary policy automatically has a stabilising effect in the event of instability in asset markets. since asset prices, as i have already mentioned, affect aggregate demand in the economy, interest rates will be raised when asset prices rise and vice versa. although we know from experience that there are no guarantees, this is likely for various reasons to have a stabilising effect on asset markets. for one thing, macroeconomic stability in itself has a stabilising effect on financial markets. for another, there is less likelihood of over - reaction, since participants in the financial markets will expect central banks to pursue a policy dictated by their

one question that often arises in the debate on monetary policy is whether it might not be better to replace the target for the cpi with a target for some other measure of inflation. one suggestion that came up during the autumn, for instance, when energy and food prices rose substantially, was that the inflation target should only apply to domestic inflation – that is increases in prices of goods and services produced in sweden. energy prices and many food prices are determined on the world market in any case and are outside the reach of the riksbank. this is true, but the price of, say, rice in our shops is not the same as the world market price of rice. the prices of goods we import are also affected at the consumer stage by conditions in sweden, for instance, via transport costs, price mark - ups by wholesalers and retailers and also by the value of the krona. when the riksbank raises the repo rate, total demand in the economy is dampened. this reduces the scope for price increases in all areas. and it is important that monetary policy focuses on keeping down the general price increases and that the inflation target is not redefined merely because some prices are rising more than others. swedish households ’ total purchasing power declines even when prices of imported products rise. so the risk of such price increases spreading to other prices and to wages will scarcely decline just because the inflation target is defined in terms of domestic prices. it is also important to distinguish between the measure of inflation to which our target applies and measures that are useful from time to time to analyse the driving forces behind inflation. the riksbank often highlights the development of other measures to describe developments in inflation and explain the monetary policy strategy in a better way. for example, last autumn one measure that was useful was cpix excluding energy. this could illustrate that we were assuming that energy prices would push up inflation temporarily but that the inflation trend would not be affected. but then is the cpi really the best measure for our inflation target? different countries have chosen different solutions – although most countries define their inflation target in terms of the cpi or a modified version of the cpi. we executive board members have said that of course the riksbank should not exclude the possibility of changing to another measure of inflation than the cpi if there are good reasons for doing so. but when discussing such a change i believe that it is important to remember the most important reason for introducing the inflation target, namely the need for a nominal anchor. this