, that short interest - rate movements may have considerable effects on the leverage of securities broker - dealers in the market - based financial sector outside the commercial - banking sector. however, new regulation may affect the magnitude of these affects, and the size of the market - based financial sector may end up being smaller after the crisis. in europe, the commercial banks dominate the financial sector. kohn ( 2006, 2008 ) specifies three conditions that should be fulfilled for central banks to take “ extra action ” to deal with a possible asset - price bubble : “ first, policymakers must be able to identify bubbles in a timely fashion with reasonable confidence. second, a somewhat tighter monetary policy must have a high probability that it will help to check at least some of the speculative activity. and third, the expected improvement in future economic performance that would result from the curtailment of the bubble must be sufficiently great. ” he concludes, also in 2008 and after thorough considerations, that those conditions would rarely be met. see also kohn ( 2009 ). in particular, if there is evidence of rapidly - rising house prices and mortgage loans, and these developments are deemed to be unsustainable and a possible bubble, there are much more effective instruments than policy rates. restrictions on loan - to - value ratios and minimum mortgages and requirements of realistic cash - flow calculations for house buyers with realistic interest rates are much more effective in putting a break on possible unsustainable developments than a rise in the policy rates. in particular, more transparency about future policy rates, in the form a policy - rate path published by the central bank, may help in providing realistic information about future interest rates. ultimately, my main conclusion from the crisis so far is that flexible inflation targeting, applied in the right way and using all the information about financial factors that is relevant for the forecast of inflation and resource utilization at any horizon, remains the best - practice monetary policy before, during, and after the financial crisis. but a better theoretical, empirical and operational understanding of the role of financial factors in the transmission mechanism is urgently required and needs much work, work that is already underway in academia and in central banks. the outcome might very well be that financial factors are considered to have a larger role in affecting the transmission mechanism and as indicators of future inflation and resource utilization. if so, central banks would end up responding more to financial indicators, in the sense of adjusting the policy rate and policy - rate path more to a given change in a

a longer period, overheating and inflationary pressure will arise. if growth is too low, the opposite will apply, resulting in higher unemployment and poorer welfare than necessary. let us compare the swedish economy with driving a car. the riksbank's job is made easier if the car and the road allow some speed, without accidents occurring. the work done in other political areas to promote growth in trade and industry is therefore very important in enabling the riksbank to maintain a low interest rate. the riksbank cannot affect potential growth ; our role is to create good conditions for other private and public operators. it is their work on structural reforms, better infrastructure, education, research, entrepreneurship, innovations, etc. that improves the economy's long - term capacity to create growth and thereby welfare in the long term. the decisive factor for monetary policy is the speed limit over a longer period of time. if we have low capacity utilisation from the start, we can temporarily have higher growth, i. e. accelerate until we have achieved the economy's cruising speed. one complication is the lack of clear signs stating the speed limit - in other words ; there is always uncertainty over where the capacity ceiling lies - or how high the swedish economy's potential growth rate is. at the riksbank we have previously estimated this to be approximately 2 - 2. 5 per cent. today, when we conclude that the inflation tendencies in the swedish economy appear to have been higher than we had previously realised, one of the possible explanations is that we may have over - estimated the swedish economy's production capacity. the inflation report to be published in march, which will form the basis for our decision on the interest rate at our next monetary policy meeting, will provide an overall assessment of resource utilisation and inflation. economic progress in the 1990s in the seam between the 1980s and 1990s, we had a clear overheating of the swedish economy, despite the fact that growth had been a modest 2 per cent a year during the 1980s. over the past five years, the economy has grown by 3 per cent a year without the corresponding worries. something has evidently changed for the better. my opinion is that the reason is positive changes particularly in four areas important for growth : the macroeconomy, increased competition, trade and developments in technology. i shall briefly discuss these and then, in conclusion, say a few words about the challenges i see for the swedish economy at present. economic