. there has thus been an increase in indebtedness internationally, parallel to a rise in property prices. as has been the case in sweden, questions have arisen regarding the sustainability of this trend and what happens when interest rates rise. developments in house prices and household indebtedness are regularly analysed in the riksbank's financial stability reports. of course, any assessments of the valuation of the house market are connected with a large measure of uncertainty. however, the calculations we have made so far do not indicate that the pricing of houses in sweden as a whole is significantly out of balance. price trends can be explained fairly well by the increase in household incomes, the decline in interest rates and a low construction rate, despite strong demand. however, one should be aware that the rate of price increase varies substantially between different regions. house prices have increased at a much faster rate in metropolitan areas than in the rest of the country. the possibility that price increases may have been exaggerated in certain individual regions or markets cannot be ruled out, although developments in sweden as a whole appear to be balanced. indebtedness, house prices and inflation forecasts what significance do house prices and household indebtedness have for the riksbank's inflation forecasts? the inflation forecasts are based on an analysis of the various driving forces behind domestic inflation and the international rate of price increase, imported inflation. domestic inflation is largely governed by cost trends and by how total demand develops in relation to production capacity, that is to say, resource utilisation. household consumption comprises a significant part of total demand and this is where indebtedness and house price trends mainly come into the forecast work. household wealth plays an important role in the riksbank ’ s assessment of how private consumption will develop. wealth affects households ’ consumption in several ways. to simplify, one can say there are two reasons why an increase in wealth, for instance in the form of an increase in the value of one ’ s own home, can be expected to lead to increased consumption. firstly, the larger the wealth an individual has, the more he or she can consume during his or her lifetime. this is a traditional wealth effect. secondly, the size of the wealth can affect the possibilities to obtain loans. this is usually called the balance sheet effect. the larger the collateral a household can offer for its loans, the greater the possibilities to borrow and thereby to consume. when the value of the property owned

philipp m hildebrand : asset management at central banks - a special case? speech by mr philipp m hildebrand, member of the governing board of the swiss national bank, at the university of st gallen, st gallen, 5 december 2003. the complete speech can be found in french on the swiss national bank ’ s website ( www. snb. ch ). * * * summary next to monetary policy, the management of international reserves is another important task of the swiss national bank ( snb ). since its obligations cannot be defined precisely, there can be no exact determination as to the optimal level of a country ’ s international reserves. in accordance with the buffer stock model, the level of international reserves should be determined - just as one would choose an appropriate insurance - based on the likelihood of a crisis, on their contribution to managing or avoiding the crisis as well as on the opportunity costs implied in holding reserves. both the insights derived from this model and from international comparison have shown that switzerland holds a reasonable level of international reserves. the long - term development of these reserves should be based on a set of clear goals, as is the case in switzerland with the growth of nominal gdp as a strategic benchmark. in defining its investment policy, the snb takes into account safety, liquidity, and performance. the new national bank law will enable the snb to better adapt its investment profile to its needs, which ought to lower the opportunity costs implied in holding reserves. as investment activity is becoming increasingly complex, so are the demands of corporate governance. in conformity with the private financial sector, central banks - the snb counts itself among them - have professionalised their investment and risk control processes and improved their accountability toward the public. with increased professionalism, particularly as a result of applying the mark - to - market principle, the snb ’ s profits are more volatile than in the past, however. in order to safeguard the independence of monetary policy and so as not to restrict investment policy, the snb ’ s annual profit distribution - as already spelled out in the message of the federal council on the new national bank law - must remain a variable residual amount in the long term and must not be tied to any specific purpose.