be for holding the repo rate at a negative level in situations where this is necessary to avoid major costs for the economy. but there are limits as to how far the rate can be cut. and, as i said, my view is that it would be difficult to cut the rate so low that people were forced to pay to have money in the bank. do expectations affect the future repo rate? if one has cut the repo rate as far as one considers possible, one can also try to affect expectations of the future repo rate among economic agents in a way that 7 jansson ( 2016 ). 5 stimulates demand. what i have in mind here is a strategy that is usually termed “ lower - for - longer ” or “ makeup strategy ” and which has been advocated by the previous chairman of the federal reserve ( the us central bank ) janet yellen. 8 the idea is pretty straightforward. let us assume that the central bank in a recession has cut its policy rate as far as it considers to be possible. exactly how low the interest rate can be set is not obvious and the assessments vary from country to country. the federal reserve usually regards zero as the lower bound and talks about the “ zero lower bound ”, while in sweden and other countries, which have cut their policy rates below zero, we talk about the “ effective lower bound ”. for the sake of simplicity i will from now on refer to this simply as the “ lower bound ” for the policy rate. let us now assume that the central bank would actually have needed to cut the policy rate lower than the lower bound for monetary policy to become sufficiently expansionary. to compensate for not being able to do this, the central bank can instead hold the policy rate at the lower bound for a longer period of time ( see figure 4 ). 9 seen in a slightly longer perspective, for instance a ten - year period, this should give roughly the same average policy rate as if one had been able to cut the rate below the lower bound. if the economic agents are aware that the central bank applies this strategy when the interest rate is at its lower bound, and they regard it as credible, then long interest rates should adapt in roughly the same way as if the lower bound did not comprise any limit. 10 if one uses the reasonable assumption that demand in the economy is not solely dependent on the current level of the policy rate but also depends on interest rates with longer maturities, this should give the central bank the possibility

and banking 37, 2005, 789 - 811. increased. this is largely related to the fact that growth in productivity has been surprisingly weak for some time. the assessment made by the majority was that an increase was needed to prevent price rises for energy and food from spreading to other areas – to prevent the high level of inflation from becoming entrenched. the increase is expected to help bring inflation back to a level close to the target within a couple of years. resource utilisation is also expected to fall but to be roughly normal at the end of the forecast period. at the same time as the repo rate was increased, the repo rate path for the period ahead was adjusted downwards compared to the decision taken in july. this is partly because growth has slowed down more than expected in sweden and abroad and partly because the price of oil and the prices of other commodities have fallen. the increase may be a way of safeguarding the real economy in the long term a common reaction to the decision to increase the interest rate was that the riksbank pays too much attention to inflation and too little attention to the real economy. i would like to comment on this claim. one reason for increasing the interest rate was that an increase was needed to prevent the high level of inflation from becoming entrenched. this could happen if the price increases for energy and food begin to spread to other areas. this could ultimately lead to a risk of the riksbank's ability to hold inflation in check being called into question and of inflation expectations remaining at a consistently high level. this is what happened in the 1970s in many parts of the world, although inflation at that time became entrenched at much higher levels than would be the case today. but even though the levels are much lower today, it could still be relatively costly to get inflation back to the target. it cannot be ruled out that this could require quite a long period with high interest rates and restricted demand. there is thus a risk that conducting too expansionary a policy today would sooner or later give rise to costs in the real economy that, furthermore, could be quite considerable. i do not feel, therefore, that it is correct to say that the increase in the interest rate is an indication that the riksbank does not care about the real economy. it is rather the case that by focusing clearly on the inflation target we will be able to avoid considerable costs to the real economy in the slightly longer term. i should perhaps add that