probably a credibility range. by that, i mean a limited range within which a country may be able to violate its stability condition and have its debt - to - gdp ratio trend upward without further economic consequences. for budgets, there may be a range within which the debtto - gdp ratio can grow without significant changes in interest rates. 9 as equation 1 indicates, economic performance in this range is by no means optimal, because the persistent deficits are subtracting funds that would otherwise be devoted to capital investment and future growth in living standards. but there may not be significant relative price effects. the same is true on the trade side ; there could be a range in which foreign claims on the united states just build up without major impact on relative prices. once the economy gets outside of the credibility range, more significant relative price adjustments become likely. on the trade side, for example, the continued accumulation of foreign claims on the u. s. economy will raise the issue of whether foreign investors will want to hold an ever - increasing share of their wealth in the form of u. s. assets. or, as is the focus of the stability condition above, whether the u. s. economy can indefinitely pay out ever - higher shares of gdp in the form of interest and dividend payments. the conventional view is that at some point there should be a relative price adjustment - some combination of rising u. s. interest rates ( to make u. s. assets more attractive ), rising foreign prices ( to make imports more expensive ), moderating u. s. prices ( to make u. s. exports more competitive ), or a change in exchange rates. each of these reactions is likely to occur naturally, and each moves in the direction of lowering the external imbalance. that is why foreign trade deficits are typically thought of as self - correcting. the main risk here is that the natural adjustments may not occur gradually, but so rapidly as to threaten various types of dislocations. there are complicating factors. one involves the currency denomination of the net debt. countries with large trade deficits often have their external liabilities denominated in a foreign currency. hence, when their own currency depreciates, the value and burden of foreign debt automatically increases. the united states does not have this problem because most of its debt is denominated in dollars say, foreign holdings of u. s. treasury bills. if the dollar were to fall, the value

also look at how the economy as a whole is developing. we have the ambition, within the framework of our price stability task, of also contributing to stable development in production and employment. how do we do this? well, by considering how quickly we should aim to return inflation to target. if, for instance, inflation is below target while growth in the economy is high, as has been the case in sweden in recent years, a monetary policy that aims to quickly push up inflation through very low interest rates could lead to demand being stronger than the economy can manage further ahead. we would then risk overheating, where prices and wages begin to increase rapidly and where inflation expectations would perhaps also be adjusted upwards. the riksbank could then be forced to tighten monetary policy substantially. if we instead gradually begin to raise the interest rate earlier, there is a greater chance that we can avoid overheating. we can thereby also avoid the recessions that often follow overheating. this type of policy can thus mean that the fluctuations in the economy are smaller over time. this is where the two - year horizon that we work with comes in. it means that we can in normal cases allow up to two years before inflation attains the target. what i have described so far with regard to the principles for monetary policy is currently an accepted view of how monetary policy with an inflation target should be conducted. central banks around the world have chosen slightly different varieties, where the details of the monetary policy system may differ considerably. however, the overall strategy is still the same. how to take into account house prices? one difficult question recently has concerned the rapid increases in house prices. these have risen at an annual rate of around ten per cent in recent years ( figure 8 ). households have been taking on new loans at almost an equally rapid rate. there are several reasonable explanations as to why house prices have been rising so much for some time. for instance, there have been relatively few new homes built over the past decade. the high productivity growth may also have meant that households expect a more favourable development in income in the long term, compared with before and therefore take on more debts and buy homes. furthermore, the credit markets are not as regulated as they were before. together with the expansive monetary policy, this has contributed to high credit volumes in the economy. however, one cannot rule out the possibility that there are also exaggerated elements in this development and that expectations have become unrealistic as to how house prices