is considered to be part of a normal adjustment process, which should be a component of forecasters ’ informal and formal models. however, as the theory of credit cycles is not especially well - developed in the standard models that are taught in the field of economics, there is reason to suspect that the relationships are underestimated by forecasters. other economists have pointed out that rises in asset prices that initially are justified by fundamentals, also attract short - term investors who contribute to pushing up prices. the longer the price rises continue, the greater the significance the speculators will have for price developments since investors with a longer investment horizon will no longer buy the assets. finally, it is only the speculators that are fuelling the rise in prices. while they know that the price increases are exaggerated, they do not know when the situation will turn. the slightest signs of an imminent change lead to large - scale selloffs, and prices plunge. in well - developed markets, participants that judge the price increases to be excessive always have the possibility to make a profit by taking offsetting positions. uncertainty over when the situation will turn, coupled with reward systems that encourage short - term gains, are likely to result in an insufficient number of investors taking offsetting positions. financial accelerator effects most likely lead to a situation where rising asset prices, regardless of whether they are being driven by short - term investors, also affect the real economy and thus can contribute to overinvestment. as regards house prices, the risk of a purely speculatively driven rise ought to be lower. this is true especially of economies such as the swedish one, where regulations make it very difficult to own and let houses and apartments for speculative purposes. empirical studies also indicate that the risk propensity of investors and lenders appears to increase according as economic activity strengthens, while it decreases markedly during economic declines. so, when economic activity has been improving over a long period, investors appear to interpret this as meaning that growth will continue to rise at the same high rate, without taking account of the risk of a slowdown. low risk premiums, possibly based on irrational expectations of future profits, can contribute to overinvestment. in a recent study3 carsten detken and frank smets show that those financial cycles that have preceded periods with large falls in output, unlike the other financial cycles, have been characterised by rapid growth in the real stocks of money and credit at an early stage of the cycle, as well as

for instance, result in a monetary policy that pushes up asset prices and debt too high. for example, the traditional models, which are grounded in an analysis of the real economy, are based on assumptions of rationally behaving households and firms, efficient capital markets and linear relationships. that households and firms are rational means that there are no systematic errors in their expectations. if these assumptions are a reasonable description of how the economy functions, there is likely to be less reason for the central bank to attach any great importance to debt levels and asset prices in terms of economic stability. in that case, debt levels and asset prices mirror the same behaviours that are described in theories and models based on the real economy and do not therefore contain any new information. but there are many studies of, and observations from, the financial markets that could suggest that the forecasts do not capture the behaviours that can lead to a build - up of the kind of imbalances that i have discussed. here, i shall confine myself to a few examples. studies have shown that asset prices and credit expansion give rise to each other and therefore play an independent role for the course of events in the cycles. bernanke, gertler & gilchrist, for example, have shown with their financial accelerator theory that rising asset prices make it cheaper to borrow and at the same time increase the supply of credit. lower financing costs boost investment and equity prices, which reduce the financing cost, and so on. they show also that the effect of the financial accelerator is asymmetric, having greater significance during an economic decline than during an upswing. it affects those credit cycles that are usually described by roughly the following course of events. during an economic boom, rising asset prices facilitate increased borrowing through the higher value of collateral in the form of financial assets, houses and apartments. when the situation then turns, most likely associated with a tightening of monetary policy, the value of these assets falls and households ’ financial situation deteriorates. if, in addition, the valuations have been over - optimistic, the price falls can be dramatic. the banks will in any case respond to the deterioration of both their own balance sheet and that of their borrowers by contracting their lending. during the following period of consolidation, inflation and economic activity will decrease. in a worst case scenario the banks ’ loan losses will be large enough to threaten financial stability. apart from the risk that expectations have been irrational, however, this kind of credit cycle