lars nyberg : monetary and financial stability from a central bank perspective speech by mr lars nyberg, deputy governor of the sveriges riksbank, at the conference on the 10th anniversary of the central bank of bosnia and herzegovina, sarajevo, 13 september 2007. * * * ladies and gentlemen, what is the interaction of monetary and financial stability? this is one of the most discussed issues in central banks and academia today, and is likely to remain high on the agenda for the foreseeable future. many central banks, including the swedish riksbank, now have dual tasks : maintaining price stability and promoting financial stability. i will begin by discussing these tasks separately, and then turn to the questions the success in bringing down inflation has raised with regard to financial stability, and how this has influenced the conduct of monetary policy in sweden. before proceeding, i should stress that the views i am about to express are my own, and do not necessarily reflect those of the other members of the executive board of the riksbank. moreover, it should be kept in mind that my remarks primarily are based on my own experiences from an inflation targeting central bank, operating in a small open economy. price stability the taming of inflation, after the destructive price - wage spirals of the 1970s and 1980s, is one of the major success stories in modern economic policy making. economic theory tells us that high inflation is bad for a number of reasons. these theories now appear to have been vindicated. the last decade has seen strong global economic growth, while, at the same time, output volatility have dropped. in practice, two paths have emerged for achieving price stability. one way is through a fixed exchange rate regime, such as a currency board. under such an arrangement, a country simply imports the monetary policy of a country with a highly credible low - inflation regime. this path has emerged as the weapon of choice of many emerging economies. these countries want to achieve price stability, while avoiding the costly deflations which otherwise might be necessary to anchor inflation expectations. the other way is through an independent central bank with a mandate to maintain price stability. this mandate is often formulated in terms of an inflation target. the inflation target operated by the swedish riksbank stipulates that consumer price inflation should be 2 per cent per year, with a tolerance interval of plus / minus 1 percentage point. for all practical purposes this arrangement is close to what is found in, for example, the uk, australia,

differently, with other methods. studies show that in recent decades the work of reforming central banks has tended to follow a clear pattern. a report from bis, the central bank of the central banks, notes the following characteristics. · the move to greater independence and the commitment to price stability entail a desire to focus on core operations and a deeper analysis. there is also a greater need to operate and communicate in ways that are effective and enhance confidence. · internationalisation also has effects, not least financial integration. for sweden there is also membership of the european union and possibly of emu. · analytical requirements are heightened in general. matters are becoming increasingly complex. another factor here is the new technologies with electronic payment systems, for example. · in our case there is also the crisis in the early 1990s and the lessons we have tried to learn from it. i shall now say something about the work we have done in recent years in three respects : concentrating on cores activities ; strength and security ; and management with an executive board. concentrating on core activities a good performance presupposes that we concentrate our resources to what is really important. the starting - point here is, of course, our main statutory functions, namely to maintain price stability and promote a safe and efficient payment system. for three hundred years the riksbank has owned a paper mill and a note - printing works in tumba and a mint in eskilstuna. these are largely manufacturing operations. through the tumba works, in the past decade the riksbank has been active in export markets and produced banknotes on behalf of a number of countries. besides manufacturing notes and coins, we distribute them. like mcdonalds and the food chains, we send our products, wrapped in plastic though not deep - frozen, to everywhere in sweden. in our case the security requirements are, of course, considerably higher. but is this really something we should be doing? at the riksbank we decided it was not. our job is to concentrate in the first place on monetary policy and the difficult systemic questions in the financial world. we have therefore decided to sell the tumba works. in our opinion, the enterprise deserves owners that are more professional than the riksbank. moreover, our distribution system has been transformed into a limited company, pengar i sverige ab ( psab ), literally, money in sweden limited. a major reconstruction has been completed and we now count on being able to sell the company at a good