to determine in advance when a realistic optimism has passed into over - optimism and in its turn pushed up asset prices, investment, consumption and indebtedness. it has rarely been possible to judge, for instance, whether a large build - up in indebtedness has expressed an adaptation to realistically based expectations of future growth prospects or whether the build - up in debt is based on exaggerated expectations. in addition, the target that has been used to guide monetary policy has rarely been able to signal early enough that imbalances were being built up, regardless of whether monetary policy was aimed at a fixed exchange rate or towards a price stability target. to simplify, one can say that the result of an exaggerated optimism in countries with a fixed exchange rate has been that the build - up of financial imbalances was expressed in rising inflation without any depreciation pressure on the currency. it has not been possible to subdue inflationary pressure through raising interest rates while optimism regarding the country's economy and confidence in the fixed exchange rate regime have remained, as a more stringent monetary policy would have reinforced the nominal exchange rate. at the same time, increases in consumer prices have been kept down by the strong currency, temporary increases in productivity, or by demand being aimed towards, property, shares and land – assets whose prices are not included in the central bank's target function. there has thus been no reason for monetary policy to counteract the emergence of financial imbalances. when the financial bubble has actually burst, the country has often suffered a deep and long - lasting recession caused by adaptations to the imbalances that have been built up. a high level of indebtedness, falling asset prices and unprofitable investments have subdued demand for a long period of time. households have chosen to increase their savings to reduce their debts. companies have been unable or unwilling to invest as a result of earlier investment mistakes and poorer prospects for the future. the banks have suffered severe credit losses, which has further intensified the recession, as their capacity to provide new credit has been limited. the situation becomes particularly serious when losses have led to acute bank crises, which has often been due to the banks being greatly exposed to a particular sector. for instance, it was an overheated property market with banks strongly exposed to this sector that was one of the main reasons behind the bank crises afflicting several countries – including sweden – at the beginning of the 1990s. adaptations to large financial im

and where both the household and corporate sectors had reduced their level of indebtedness. saving in both of these sectors was therefore at a high level and indebtedness fairly low when growth in the swedish economy picked up. now that economic activity is slowing down, the private sector's indebtedness is not particularly high, from a historical perspective. furthermore, the lower interest rates will mean that interest expenditure comprises a much smaller burden for borrowers now than previously. although the surplus in saving in the private sector has declined gradually in recent years, it only became a slight deficit towards the end of last year. this applies to both the household sector and the corporate sector. there is thus a substantial difference here from developments in the american economy, where saving in the private sector at the same point in time amounted to almost 7 per cent of gdp. the risk of widespread financial imbalances having built up here in sweden is therefore slight. growth in sweden thus need not be hampered to any large degree by indebtedness in the household and corporate sectors or by investment mistakes in swedish companies. at the same time, central government finances have been consolidated and the central government's established ceiling for expenditure and its targets for the current account balance have reduced uncertainty over central government finances in the near future. the support for and confidence in the inflation target are yet another fundamental factor helping to create favourable conditions for growth in the swedish economy. to summarise, the swedish economy is in good condition. this speaks in favour of the slowdown in gdp growth being moderate and production now entering a growth path that is at a level more easily sustainable in the long term. the uncertainty stems mainly from the outside world and particularly from the risks arising from financial imbalances in the american economy. however, there are also many indicators there that confidence will return fairly soon and that the economic decline will not be dramatic.