that in the wake of such fundamental changes, like the one currently transforming the swedish retail payments market, new questions keep arising. with change, there will be winners and losers. in this case the winners are the swedes who have adapted to electronic payment means. losers are the ones who want, or for some reason need, to keep on using cash and who increasingly find themselves in a world where access to cash, and acceptance of cash, are on the decline. this creates a new challenge for society. this change needs to be managed. for a central banker, the transformation of the retail payments market also implies a more fundamental question. if cash basically disappears, then the general public will lose access to central bank money – they will only have access to commercial bank money. is that a good outcome? responding to this, the riksbank has decided to analyse a “ possible do ”. should we issue an electronic currency? an e - krona? we have given ourselves about two years to come up with an initial answer to this question. one possible outcome is that we as central bank in some sense will ourselves become an innovator. moreover, what we eventually decide to do is likely to affect the possibilities and business cases for different financial innovations in more general terms and have possible repercussions on many other aspects of central banking, such as monetary policy and financial stability. to conclude, i believe that a central bank has an important role to play. what we do, and what we do not do, will affect the pace and the substance of innovation in the financial system. i believe this to also apply to the regulatory community in general. we can talk about the promise of innovation, but we also need to walk the talk – that is to make decisions that balance innovation, stability and growth. that will by necessity involve deciding upon a suitable degree of public and regulatory intervention. there will be winners and losers from these decisions. making the decisions, and finding that balance, is a major challenge, but it is also an unavoidable challenge. 4

and figure 7 ( b ) foreign currency reserve as a proportion of the country ’ s short - term debts in foreign currency 7 ( a ) 7 ( b ) reserves to fx funding reserves to gdp 9 10 6 7 8 8 3 4 4 4 4 5 1 1 2 2 2 3 3 irl cyp ndl grc mlt bgr fra deu bel gb swe prel fin est esp ita svn can aut svk aus swe sgp nor hkn jpn che cze isl kor note. fi gure 7 ( a ), per cent. foreign funding refers to swedish banks ’ ( including swedish subsidiaries but excl uding foreign s ubsidiaries ) market funding and deposits i n foreign currency. the broken part of the l ine represents the riksbank ’ s forecast based on the reduction of the currency reserve proposed i n the draft. figure 7 ( b ), countries marked in grey belong to the euro a rea. sources : imf, statistics sweden a nd the riksbank. conclusions for monetary policy i opened by noting that these are unusual times in the swedish economy. we have strong economic activity at the same time as monetary policy continues to be expansionary. inflation has been below target for a longer period, but is now rising and approaching 2 per cent. the expansionary monetary policy is necessary for inflation to stabilise at 2 per cent. despite the difficulties encountered in recent years in bringing inflation up, i think that flexible inflation targeting, on the whole, works well. but monetary policy cannot, by itself, solve all the economic problems sweden and the rest of the world are struggling with. real interest rates have fallen for a long time in the rest of the world and in sweden. it is also likely that interest rates will remain low in the period ahead. this may make it more difficult to stimulate the economy with interest rate cuts when economic activity becomes weaker and inflation is below target. in such a case, it could be necessary, both for the riksbank and other policy areas, to implement other measures. when the interest rate has been low for a longer period, it also entails increased risks for the financial system and financial stability. stability is a condition for both monetary policy and fiscal policy to succeed. the free movement of capital and 20 the rapid financial development have led to increased capital flows that affect asset prices, indebtedness and exchange rates. and this limits monetary