, which is necessary if one wishes to convince them of the need to lean against the wind. the policy the riksbank has conducted for some time means that one deliberately allows longer time for both inflation and the real economy to return to normal levels. at the same time, this is justified by the riksbank ’ s mandate to stabilise inflation around the inflation target and production and employment around long - run sustainable levels. it is probably not clear to everyone how the actual aim of the policy is connected to the justification for it. the tradeoffs therefore need to be made concrete and clear – partly so that the riksbank ’ s principal can assess its monetary policy, and partly so the general public can understand the basis for the policy the riksbank conducts. what does one gain by conducting a policy that as the cpi is to a great extent affected by repo - rate cuts in connection with the financial crisis, it has been natural to focus more on underlying inflation measured in terms of the cpif. households ’ total assets are much higher than their debts. a large part of this concerns housing. but there is also a considerable part that consists of more liquid assets, the value of which need not fall if housing prices were to fall. bis central bankers ’ speeches deliberately allows it to take longer for inflation to return to the target and for resource utilisation to return to a normal level? is it worth the cost in terms of poorer target attainment? this is not easily illustrated. it is a question of a “ new ” type of trade - off being included in the material on which the analysis and decisions are based and it takes time to find good forms for this. it also involves illustrating risks and uncertainty and making them more concrete, and this is always a challenge. the riksbank has been carrying out work on developing this for some time, and an outline as to how financial imbalances can be included in the monetary policy assessments has begun to take form. the july monetary policy report included such an outline that shows how one can approach this question. 11 the reasoning concludes that one can regard recent monetary policy as a trade - off between target attainment in the coming years, that is the period for which the riksbank normally makes forecasts, and target attainment in the long run, beyond the forecast horizon. 12 the idea is that a monetary policy that solely focuses on target attainment a couple of years ahead could miss the fact that financial imbalances

inflation and how much it varies over time. monetary policy can not, on the other hand, significantly affect the average level of real quantities such as production, employment and unemployment. the average level of such quantities is determined by other factors, such as demography, competition and tax policies, research and development and education and training. there are therefore good reasons why monetary policy should focus on inflation and have an inflation target. flexible inflation targeting policy a strict interpretation of the possibilities of monetary policy can easily be perceived as being that central banks can only affect inflation. however, although monetary policy can not affect the average level of real factors, this does not mean that it is ineffectual in stabilising fluctuations in these factors. i mean by this that monetary policy can contribute to the stabilisation of resource utilisation at a normal level. in practice, central banks with an inflation target conduct what is called flexible inflation targeting. this flexibility means that – alongside the long - term inflation target – the central banks also strive to ensure that fluctuations in both inflation and the real economy are kept at a reasonable level. striking the right balance between these factors is what the riksbank calls a well - balanced monetary policy. the flexibility of inflation targeting becomes particularly important in situations where a conflict arises between the objective of reaching the inflation target and the objective of stabilising the real economy. in some situations, the inflation target calls for a certain type of monetary policy while resource utilisation calls for another. one example of this is the situation that prevailed during most of 2008, the year before i joined the executive board. energy and food prices increased dramatically. this pushed up inflation to unexpected levels. at the same time, economic activity appeared to be declining – a decline that eventually became a severe economic downturn. if, in such a situation, the interest rate had been substantially increased in order to rapidly bring inflation back down to the target, the economic situation could have been undermined even more. however, as the riksbank works with a flexible inflation target we can choose not to bring inflation back to the target as quickly as possible. this flexibility also gives us scope to stabilise the fluctuations in the real economy. how long it should take to return inflation to the target depends, among other things, on the type of shock that has occurred, the size of the shock and how long it can be expected to affect the economy. an almost obvious question in the exam papers on macroeconomics that