the target. this was especially important when the economy was hit by a supply shock, and we needed to trade off reaching the inflation target and closing the output gap. inflation was below target until last year. now, hit by a demand shock and looking ahead, we know that a trade - off is absent – the economy needs stimulus. but in the face of an unusually high degree of uncertainty, and given an unusually large shock, i believe that it is sensible to continue to be patient. we still try to have a long - term perspective, and we will carefully consider the effects of measures already taken as we move along. even with monetary policy able to counteract cyclical fluctuations to some extent, there is a limit to how much the one tool at the central bank ’ s disposal – the key policy rate – can accomplish. regulations need to underpin the robustness of the financial system with respect to cyclical fluctuations. supply side policy needs to support the capacity of the economy to absorb asset price fluctuations. as for regulatory reform of the financial sector, i believe we both need to reconsider the structural elements and we need some new discretionary features. in order to limit excessive credit growth, the leverage ratio of banks should be contained, with higher capital requirements. the procyclical effects of such capital requirements need to be addressed. since profits fall during a recession, capital requirements then tend to be more binding, reducing credit availability when it is most needed. the work aimed at changing the procyclical effects of capital requirements is still in its infancy. banks ’ incentives to increase loan provisions during upturns could be strengthened. this would smooth profits and hence make capital requirements less procyclical. ideally, loan provisions should internalise some of the cyclical risk by being based on longer term risk assessments. in addition, one could reduce the procyclical effects of capital requirements more directly by making the capital requirements themselves more flexible over the cycle. imposing capital requirements always involves a trade - off between financial stability concerns and efficient capital allocation. in a downturn, when concern about the availability of credit may be greater than in an upturn, a temporarily reduced capital requirement may be justified. the condition must be that the buffer is built up again during the upturn. such time variant capital requirements would also be demanding to implement, however. it would leave the relevant authority with the discretion to assess the cyclical situation and impose appropriate capital requirements. the time horizon over which the

of the riksbank being an authority under the riksdag ( the swedish parliament ). it was therefore considered unnecessary to specify any further objective than price stability in the law text. there were probably also some fears that statutory objectives for the real economy could give the wrong impression – that monetary policy could also govern long - term developments in growth and employment, for example. it is now widely accepted that these are determined by factors that are not directly affected by monetary policy, such as the rate of technological advances and the efficient functioning of various markets. in general terms, one can say that the policy conducted by the riksbank is aimed partly at limiting the inevitable deviations from the inflation target and partly at ensuring that the real economy does not fluctuate excessively. the objective of monetary policy is price stability, but the riksbank also considers real economy considerations to be important. this is characteristic of what is known as flexible inflation targeting, which as far as i know, is conducted by all central banks that have inflation targets. monetary policy affects the economy with a certain time lag. monetary policy decisions must therefore be based on forecasts of future inflation. normally, monetary policy is aimed at achieving the inflation target within two years to avoid the deviations from target from being too large and too protracted. this two - year horizon can be regarded as a restriction that the riksbank has placed upon itself as a means of upholding confidence in the inflation target. at the same time, it provides an opportunity to show consideration for the real economy. if, for instance, there is a shock that leads to inflation being pushed upwards despite weak demand, a very rapid return to the inflation target would entail large negative effects for the real economy – an even greater slowdown in the already weak demand – than if the recovery was allowed to occur at a slower pace. if inflation is instead held back despite good growth in demand, attempts to quickly return it to target through very expansionary monetary policy could lead to the economy overheating. over time a policy that quickly subdues inflationary impulses would perhaps result in more stable inflation, but there would be substantial fluctuations in the real economy. we have chosen a two - year horizon for monetary policy because this is considered to give sufficient scope in most cases to ensure acceptable developments in the real economy. however, the rate at which it is desirable to bring inflation back on target depends on what shocks the economy has suffered and how substantial they