speech date : 2021 - 05 - 20 speaker : first deputy governor cecilia skingsley venue : seb ( digitally ) sveriges riksbank se - 103 37 stockholm ( brunkebergstorg 11 ) tel + 46 8 787 00 00 fax + 46 8 21 05 31 registratorn @ riksbank. se www. riksbank. se adapting to new conditions – monetary policy freedom with responsibility * 19 march, 2020. it's 6. 30 am. i am standing waiting for a connecting bus at danvikstull, on my way to the riksbank at brunkebergstorg. the telephone rings. it turns out to be stefan ingves, governor of the riksbank. he says that the federal reserve is offering dollar loans to us and a number of other central banks. we executive board members had already had many conversations both in the office and over the phone during the preceding days. both in sweden and abroad, the pandemic quickly led to a fall in economic activity of historical proportions. it was necessary to ensure as soon as possible that the financial system could manage to maintain credit granting at very low interest rates. a financial crisis on top of a health crisis and the rapidly emerging real economic crisis must be avoided. on the previous thursday, 12 march, the riksbank had decided to offer up to sek 500 billion in loans to swedish banks for onward lending to companies. on 16 march, the riksbank decided to begin broad asset purchases for up to sek 300 billion. and what happened with the dollar loans? the same evening, 19 march, the riksbank was able to publish the information that new dollar loans would be available with effect from the following week. stefan ’ s telephone message was a small, but clear glimpse of light in the first weeks of the pandemic. belonging to the narrow group with back - up from the us central bank, the federal reserve, regarding dollar liquidity was of central importance during the financial turbulence. the riksbank, like other central banks, had taken a number of measures during the coronavirus crisis to manage the economic effects of the pandemic. but the number of measures also raises new questions. i would like to talk about one of * i would like to thank bjorn lagerwall for his help with writing this speech, and emma bylund, charlotta edler, dag edvardsson, frida fallan,

of flexible inflation targeting? this type of criticism was raised in a recent external evaluation authored by francesco giavazzi and frederic mishkin. a close adherence to the textbook account of flexible inflation targeting requires a belief that the analytical tools and models currently available have accurately captured the important linkages in the economy. it requires a belief that we as central bank economists have a solid understanding of all important aspects of the monetary transmission mechanism. in my opinion – which is neither very original nor controversial – we are not quite there yet. one such area in which our understanding can be improved concerns the credit markets. a fundamental problem is that we presently lack the analytical tools that accurately capture the role played by credit and house prices in the economy. the research of chairman bernanke and others regarding the importance of collateral constraints and the financial accelerator effects on firms ’ investment have paved the way for an increased understanding of these complex issues. their research has been extended by others to the household sector – the idea being that as house prices increase, credit - constrained households are able to engage in so - called mortgage equity withdrawals and raise their consumption. in time, insights from these models will help us to better analyze house prices and household debt in integrated, general equilibrium setups. in fact, this is an area into which the riksbank is putting some modelling efforts, trying to understand how credit markets can be integrated with our general equilibrium approach to fluctuations in growth and inflation. in the future we will hopefully be better able to analyze how developments in asset prices influence the future course of inflation and output, and how the monetary transmission mechanism is affected by changing asset prices. until we are confident that our various formal models adequately capture the risks that we in the executive board are concerned about, we will have to continue relying heavily on judgement when taking such effects into account in the conduct of monetary policy. let me reflect a bit on what in my mind has brought about this stance. on the one hand we normally talk about inflation targeting in a two year time perspective, on the other hand there are risks associated with credit and asset prices that may lead to substantial deviations from the forecasted inflation and output paths. the judgement issue then becomes one of meeting or not meeting the target at the two - year horizon versus the risk of costly deviations both within and beyond the normal forecast horizon. such deviations are likely to be low probability events but with high costs in inflation and real terms should they occur. we know that these developments are very