an exploration of several avenues for mitigating them and this should, to my mind, not exclude the possibility of monetary policy actions. i ’ m not saying that a central bank should target asset prices per se. stock prices and real estate prices rise and fall for many reasons. in my view, however, a central bank needs to be observant when notable increases in asset prices are one of several imbalances that are building up even if inflation in goods and services does not show any sign of rising. such imbalances could be a combination of strong credit growth, rapidly rising investment and a marked deterioration in the private sector ’ s financial balance. i do not mean to imply that determining when such a situation is on the way is particular easy. my point is that monetary policy should not be excluded a priori in a scenario like this. there are many other difficult assessments that central banks have to make. here i am thinking about variables like the economy ’ s potential growth rate, the output gap and the nairu etc. why should identifying asset market misalignments, excessive credit growth and a rapid decline in private financial balances be more difficult than forming an opinion about variables such as these? my view about monetary policy in this respect is of course closely bound up with my experience of the swedish banking crisis, but it is also in line with a central bank ’ s mandate to achieve long - run price stability. if anything, a financial crisis substantially increases the risk of outright deflation after some time. the central bank could manage this risk in two ways : by at least trying to prevent the bubble from building up by tightening monetary policy at an early stage, and then by loosening monetary policy aggressively if a bubble builds up and bursts anyway. to my mind, both such actions would be in line with focusing on long - run price stability, whether the central bank follows an explicit or an implicit inflation targeting approach. although i will be leaving my job as governor of the bank of sweden towards the end of this year, i have no qualms about forecasting that financial stability will remain on the agenda and be a key challenge for financial authorities for many years to come.

years. this leads to my third question : is all of this monetary stimulus simply sowing the seeds of the next financial crisis? the side effects of aggressive and prolonged monetary stimulus are well known – it promotes excessive risk - taking in financial markets and excessive borrowing by individuals. these are the very ingredients that led to the 2008 financial crisis in the first place. accordingly, this question merits a serious response. to begin, we knew back in 2008 that stimulative monetary policies would encourage people to borrow more to buy more homes and cars. that is why we do it – to buffer the downturn in the economy. this happens in every business cycle, not just this one. what distinguishes this cycle is its duration, which is leading to a buildup of financial stability risks over time. we study these risks in detail in our financial system review, which is published twice a year. the next issue will be released on 10 december. importantly, the world has changed since 2008. a key commitment of the g - 20 in 2008 was to strengthen the global financial system. that work is very well advanced, and the system is far better capitalized and more resilient today. furthermore, there have been a variety of macroprudential policy changes that have made the system safer. here in canada, for example, we have strengthened the rules around the mortgage market in several ways. those changes, combined with very high - quality underwriting even before those changes were made, make the canadian situation very different from what we saw in the united states just before the crisis. that being said, some critics would still say that we are running the risk of creating the next financial crisis through our actions. i might ask in response : what is it you would have us do, then? as the central bank, we only have one real channel of influence, which is to set short - term interest rates. right now, we are providing monetary stimulus sufficient to bring inflation sustainably to our target within a reasonable time frame, around two years from now. to argue that we should instead set interest rates in a way that reduces financial stability risks, then, is clearly a call for higher interest rates. let ’ s walk through a thought experiment together. what would our world look like today if, instead of keeping interest rates low to stimulate the economy, both canada and the united states had moved their policy rates back up to neutral at the beginning of 2011? we bis central bankers ’ speeches estimate that the neutral rate