real economy. there is no reason to change this. it is a precarious task to try to quantify what level can be considered normal for capacity utilisation. estimates of the output gap - that is, the difference between actual output and equilibrium output – can vary considerably depending on what method is used. this means, for instance, that attempts to estimate the amount of spare resources on the basis of an analysis of the labour market can provide an entirely different picture than when only gdp data are used to calculate the output gap. developments in recent years, with strong production growth and falling or only slightly rising employment are examples of how contradictory the signals can be. one weakness in this context is that production data is revised regularly. this makes it particularly difficult to estimate the amount of spare capacity there is in the economy at present. the picture of how high capacity utilisation was at a particular point in time can look different when new data are received and earlier outcomes are revised. one example worth mentioning is that the first data regarding gdp growth in sweden during the first quarter of 2005 was 1. 4 per cent, while the most recent calculations indicate that the figure was actually 2. 1 per cent. the fact that there is considerable uncertainty regarding such a central variable as capacity utilisation is, of course, a problem. everything would be much simpler if it were possible to quantify capacity utilisation in the same way as inflation can be measured. however, as it is not possible, i believe it is wise not to pretend to have this knowledge. for similar reasons, precise money supply measures have also been abandoned. our forecasts of growth and inflation must nevertheless essentially be based on a view of the position of the economy with regard to a situation with normal capacity utilisation. in practice, a large amount of information from different sources must be weighed together to make an overall assessment. we can then use our forecasts and what we believe we know of monetary policy's effects in the short term and in the slightly longer term and then mark out the approximate path. connections to the credit expansion and house prices much of what i have described so far is largely an accepted view of how monetary policy with an inflation target should be conducted, although there may of course be differing opinions as to how the policy should be formulated in more detail. i intend to conclude by touching on a slightly more controversial subject ; namely the interaction between asset prices and a stable real economy with low inflation. credit volumes and

to use fiscal policy to support the bank sector and to maintain demand in the economy. as tax revenue has fallen as demand has weakened so much, this has led to large budget deficits and rapidly growing government debt. one might say that the debt problem has been transferred from the private sector to the public sector. so to return to my earlier discussion of the debt crisis in the early 1980s, one can perhaps say that the result of the international imbalances was once again a form of public debt crisis. all in all, this means that the global economy is now facing at least three major challenges : firstly, the regulations for the financial system need to be tightened, and supervision needs to be more effective. the aim is, of course, to increase stability and resilience in the financial system and reduce the risk of future crises. secondly, as i recently noted, many countries have experienced problems with large deficits in their public finances. this is a problem that has now become acute, and needs to be dealt with. we in sweden are all too well aware of the confidence problems that can arise from mismanaged public finances. it is of course easier to make the necessary consolidation if private sector demand is kept up. one could say that many countries therefore need to undergo what could be described as an internal adjustment of demand – from public to private. 2 thirdly, an external adjustment of demand is also needed. many countries in the western world, and not least the united states, which was overly dependent on high domestic demand before the crisis, must rely more on exports in the future. correspondingly, countries which have accumulated large current account surpluses, and in particular china, will have to rely more on domestic demand. thus, what is needed is a changeover from domestic to foreign demand in some countries and the reverse changeover in other countries. create new regulatory systems there is currently fairly substantial international unity on the first issue – the need for a better regulatory framework and more effective supervision of the financial sector – even though much of the details remain to be discussed. there has also been some progress in this field. one example is what is known as the basel iii regulations, agreed by central banks and financial supervisory authorities around the world some weeks ago. in brief, these involve raising the international requirements regarding the capital and liquidity the banks must hold. for instance, a larger share of the capital must be real equity capital. another example is that the eu has established a special body, the