stability, which is one of the themes for our forthcoming discussions, has always been an important item on the central bank policy agenda. a well - known swedish economist, knut wiksell, was a clear exponent of the idea in the late nineteenth century. as it happens, he addressed an audience on the subject here in stockholm a hundred years ago almost to the day, namely on 14 april 1898. in one of his books he wrote : “ if prices rise, the rate of interest is to be raised ; and if prices fall, the rate of interest is to be lowered ; and the rate of interest is henceforth to be maintained at its new level until a further movement of prices calls for a further change in one direction or the other. ” just over three decades after his address in stockholm, sweden had to leave the gold standard in september 1931. the objective of monetary policy was declared to be to use “ every available means to maintain the swedish krona ’ s domestic purchasing power ”. in this way the riksbank was the first central bank to declare openly that its monetary policy norm was price stabilisation. notwithstanding this long tradition, after inflation ’ s rising trend in the post - war era, swedish economic policy ’ s reorientation toward price stability did not begin until the late 1980s and early 1990s. that was a decade or so after such realignment had been initiated in other countries. by then, sweden had experienced twenty years of inflation that averaged 8 per cent a year. that was the longest inflationary period since the early nineteenth century. in contrast, in the one hundred and forty years from 1830 to 1970, inflation in sweden had averaged an annual rate of 2 per cent. so one can say that in the present decade we have been re - establishing our roots. sweden ’ s policy realignment in the early 1990s was, however, more painful than anyone could have foreseen. one conceivable explanation is that, having waited longer than other countries, the road back to price stability was more difficult for us. there were also a number of exceptional events along the way. what was perhaps the worst bank crisis of the century erupted in the wake of the 1980s ’ bubble economy. exchange rate turmoil was such that, during some dramatic days, the instrumental rate was hiked to 500 per cent. in the early 1990s the budget deficit grew to be the largest in the industrialised world. there are many similarities, as well as some differences, between the

##economic indicators accordingly play an important part not only in the assessment of future inflation but also in the analysis of payment system stability. experience has shown that a balanced macroeconomic policy and stable prices reduce the risk of shocks that threaten financial stability. analyses of these three aspects are presented twice a year in our financial market report. the riksbank is accountable for oversight and the financial supervisory authority for supervision. this means that the riksbank is primarily concerned with the development of a system or a market, while the fsa considers the situation in each institution as well as the system ’ s overall stability. but as the dividing line between these two functions is blurred in practice, it is important that these two authorities cooperate closely. such cooperation is indeed a hallmark of our interaction, from senior management down to divisional staff. note, therefore, that while oversight is an important riksbank function, the direct supervision of sweden ’ s financial system is not our concern. our legislators have assigned the latter role to the financial supervisory authority, which accordingly has the possibility of directly pointing to shortcomings in particular institutions. the riksbank may nonetheless detect problems at an early stage because they are likely to leave their mark on the payment system, which is the riksbank ’ s concern. our chances of influencing the course of events then lie in contacting the bank ’ s executives and informing the financial supervisory authority. our financial market report can no doubt also play an important part in exerting a more continuous influence. in the longer run, the riksbank can also contribute to stability through international collaboration, as well as by participating in sweden in legislative work and the structural adjustment of various systems. undervalued credit risks — a recurrent phenomenon one aspect of the riksbank ’ s oversight of financial stability in sweden has been the analysis of the run - up to the bank crisis here and the possible causes of crises in other parts of the world. the causes and course of the various crises have differed in some respects but they do present many similarities. many of them were preceded by a period of rapidly rising asset prices and a strong expansion of credit. this period ended with an abrupt reassessment — a jolt that altered risk assessments and led to heavy losses for those involved. signs of economic problems meant that the supply of credit virtually ceased. it seems that the stronger the credit supply in the first period, the more serious were the effects in the second phase, with decreased production and rising unemployment. another