to develop these models to better incorporate financial factors. neither can it be required that the models capture serious financial crises. this would probably require the development of special analytical tools and models. the role of monetary policy must be developed and clarified. even if improved supervision and regulation enable us to reduce the risk of serious financial imbalances accumulating, monetary policy will still face difficult dilemmas. the financial markets have a remarkable capacity to develop continually and to find ways past regulation. consequently, we cannot rely on supervision and regulation always succeeding in preventing financial imbalances from arising. in the future, we will certainly continue to see various forms of bubbles, in which asset prices increase in a manner that is not sustainable over the long term, together with a rapid growth in credit. in such cases, the central banks must take a position regarding whether and to which extent monetary policy should consider this phenomenon. the debate regarding the extent to which monetary policy should attempt to counteract the unsustainable development of credit growth and asset prices – a policy often called “ leaning against the wind ” – has been spurred by the current crisis. those who have doubts about such a policy maintain that it may entail an unnecessarily tight monetary policy, with costs in the form of a low utilisation of resources and low inflation, at the same time as monetary policy is deemed to be a blunt instrument to use against financial imbalances. according to this assessment, it would require excessively large and costly interest rate increases to prevent these imbalances from arising. such imbalances, of course, frequently build up in lars e. o. svensson discusses this in more depth in his speech ” flexible inflation targeting : lessons from the financial crisis ”, held on 21 september 2009 at de nederlansche bank, amsterdam. times of great optimism and excessive future confidence, and, in such a situation, increased interest rates may have a limited effect on lending and asset prices. it is entirely possible – and, in my opinion, perhaps even likely – that this assessment is correct, but i would like to emphasise that there exists a significant degree of uncertainty at this point in time. so far, research has not had much to say about the ability of monetary policy to counteract financial imbalances. naturally, this observation also implies an argument against any policy that strongly advocates a monetary policy actively aimed at preventing financial imbalances. however, my view is that, in certain situations,

in order to stimulate the growth needed to help sweden out of the crisis. at present, it is not the time to counteract imbalances by leaning against the wind. however, should this development become cause for concern, there are other means for making mortgages more expensive for households and thus reducing demand for housing and subduing price development. one such method would be to require greater mortgage repayments. this would increase households ’ monthly expenses directly and would thus be an effective means of subduing demand. another method would be to lower the loan - to - value ratio of each property. both of these possibilities will be open to the banks themselves when they consider that there exists due cause. but they are also measures that finansinspektionen can prescribe if it is deemed that developments are beginning to be cause for concern. in its recently - published risk report, finansinspektionen discussed these possibilities. we at the riksbank will make an announcement when we feel that a serious imbalance risks accumulating. as regards the housing market, i do not believe that the greatest risk is a matter of either monetary policy or financial stability. the greatest risk is that more and more households forget that interest rates will be back at normal levels quite soon, which will entail mortgage interest expenditure of possibly three to four times current levels for those with variable interest rates. and most households in sweden have variable interest rates. we occasionally hear from analysts or the press that the riksbank is not making it sufficiently clear that interest rates will eventually rise. so let me repeat this once again in clear language, just to be on the safe side. when the economic upswing gathers speed – and the recovery has already started – interest rates and, accordingly, households ’ loan costs will rise very rapidly. this should be considered very carefully by those borrowing, just as it should be considered very carefully by bank staff handling lending to households.