##ilisation and the monetary stance accordingly becomes less expansionary, the krona should appreciate, accompanied by diminishing surpluses on the current account. you would, of course, like to know the rate at which the krona would be linked to the euro in the event of sweden opting to join the monetary union. unfortunately it is still too early to answer that question. the rate will depend, for example, on sweden ’ s competitive position relative to the countries that have already adopted the euro. we would also have reason to aim for a central rate that puts the swedish economy on the right track and promotes a continued adjustment to internal and external balance. the optimum central rate might differ somewhat — though probably not all that much — from the market rate in the event of sweden joining erm2 if, for instance, sweden ’ s monetary policy and cyclical position were to deviate from the euro countries ’ prior to swedish actually joining the monetary union. such a difference would also be motivated if the market rate were to be affected by short - term shocks in financial markets. in the light of what we know today, however, the direction of the krona ’ s path seems to be clear : erm2 membership, if it occurs, will be arranged at an exchange rate that is stronger than the recent level.

the united states, for example. in sweden savings are also high to start with, unlike the united states where they have fallen to historically low levels. there is always a risk that house prices, and also other asset prices such as shares, which have been pushed up by exaggerated optimism or speculation, could plummet. it would appear that swedish price movements can be explained by fundamentals, and that the speculative element has happily been conspicuous by its absence. as property often functions as collateral for loans, a large fall in prices would affect the banks. in addition, developments in the property market affect demand in the economy. rising house prices mean that households can take on new loans to increase their consumption. correspondingly, falling house prices can contribute to subduing demand in the economy. an imf study of twenty property crises in different countries shows that they entailed a fall in prices of 30 per cent. the countries ’ gdp was on average four per cent lower three years after a property crisis had started than it would have been without the fall in prices. 1 the scars in the real economy may well be considerable and given this it is interesting to discuss how a central bank should react to changes in asset prices. in the international debate on asset prices and monetary policy there are several different points of view. a common view is that monetary policy should only react to changes in asset prices to the extent that these affect the central bank ’ s inflation and growth forecasts. one should thus not have a separate strategy for dealing with changes in property prices. others think that a central bank can improve the outcome for inflation and production by reacting to changes in asset prices over and above their consequences for the inflation forecast. two main arguments have been put forward. firstly, monetary policy can alleviate the effect of the price change on the real economy. secondly, the actual knowledge that the central bank will react should reduce the probability of exaggerated price movements occurring. the difficulty lies in determining whether or not prices are increasing at an exaggerated rate. it is not necessarily so that a central bank is better qualified to make such an assessment than the market participants. in addition, there is uncertainty over how monetary policy affects asset prices. the riksbank conducts what is known as flexible inflation targeting. the objective is that the annual change in the consumer price index ( cpi ) shall be 2 per cent, but we also attach some importance to attaining a balance in production and employment. asset price movements are normally included within the scope of flexible inflation targeting