attains the economy ’ s long - term sustainable level, remains for the most part intact. … while the conditions for a turnaround in the euro area are poorer. the total international recovery expected during the coming year does not look to be as strong as the riksbank anticipated in december. the background to this is that developments in the euro area in general and in germany in particular look rather gloomier than they did before. the euro area ’ s export industry is hampered by international uncertainty, as well as a stronger euro and a weak labour market is affecting households ’ consumption and confidence in the future. this means that the international economic prospects look rather poorer now, which was also the conclusion of the executive board at its monetary policy meeting on 6 february. however, this assessment is based on the assumption that the iraq crisis will develop in a way that will not significantly deteriorate economic prospects. flat growth path for the swedish economy the financial unease has also affected the swedish economy. industrial production has stood still during the autumn and order books have been slow to fill. this is perhaps not so strange in the light of the “ wait - and - see ” mentality prevailing on important export markets. however, as the international economic climate improves, this and the cyclical pattern for investment are expected to give impetus to industrial production in sweden. over the past six months, swedish households have become increasingly pessimistic in their view of the future, which is perhaps understandable taking into account the negative news with which they are confronted : rising energy prices, higher taxes and expected cuts. the scope for consumption will be under pressure from these factors in the near future. at the same time, households ’ savings were at a high level in 2002, which means that there may be some scope to increase consumption despite the restraining effects. altogether, i believe there is also reason for a downward revision of the estimate of the swedish growth rate over the coming years. the expected upturn is assessed to be somewhat superficial. this also assumes that the iraq conflict does not develop in a way that will seriously deteriorate future prospects. the shaping of monetary policy a decisive factor in the shaping of monetary policy in future is the total picture of inflation prospects. a slightly more subdued growth in demand both in sweden and abroad is expected to lead to capacity utilisation being slightly less strained. at the same time, energy prices have pushed up inflation. however, the riksbank ’ s assessment is that the upturn in inflation

hermann remsperger : heavy tails and stable paretian distributions in finance and macroeconomics welcome address by professor hermann remsperger, member of the executive board of the deutsche bundesbank, at the bundesbank conference centre in celebration of the 80th birthday of professor benoit b mandelbrot, eltville, 9 november 2005. * * * ladies and gentlemen, dear professor mandelbrot, i have the great pleasure of welcoming you to the bundesbank conference on “ heavy tails and stable paretian distributions in finance and macroeconomics ” on the occasion of the 80th birthday of professor benoit mandelbrot. nowadays, it is common knowledge that prices in financial markets do not always behave in the manner that normal distribution would predict. at the same time, modelling financial markets is one of the most important tasks a central bank has. a thorough understanding of financial markets is necessary for appraising the transmission of monetary policy and thus maintaining price stability as well as for preserving financial stability. either way, extracting market expectation is always an important part of the exercise. ultimately, we would like to estimate a distribution of all the relevant economic variables. but the complexity of the real world does not allow a meaningful estimation of the economic system as a whole. so far, we have been restricted to concentrating mainly on estimating the conditional expected value, knowing that information on dependencies and higher moments would be desirable. models of the monetary transmission channels would suggest that the central bank sets the short - term interest rate, which, in turn, influences interest rates over the entire maturity range, the exchange rate and, possibly, other asset prices. through the different spending components, these financial variables affect output and prices. furthermore, the banking channel has to be taken into consideration. that means that the effect on the availability and terms of bank loans and subsequent impacts must be observed. this is especially true in a bank - dominated financial system such as the german one. standard models used to assess the impact of monetary policy decisions, like the expectation augmented phillips curve, need to model inflation expectations. it is normal practice to deduct a certain formation of expectations from economic theory, which produces an estimation model. lucas ’ rational expectations are probably the best - known example. a different approach for extracting expectations concentrates merely on reading financial data – without the underpinning of a comprehensive economic model. prices of financial instruments can reveal some expectations. and innovative products are widening