exactly where new risks will arise. simple rules can form a clear benchmark in uncertain situations, and there is a lot of academic theory to back this up. the economist frank knight introduced the concept of “ knightian uncertainty ” by making a distinction between uncertainty and risk in the sense that uncertainty cannot be quantified. indeed, we don ’ t know where we are heading, or what we will encounter along the way. we simply have to learn to live with unknown unknowns. another economist, hayek, also saw imperfect knowledge as a central issue. simple, robust rules can make a difference in such an uncertain and imperfect world. in a complex environment, we cannot possibly consider or measure all the conceivable outcomes. as well as being too expensive from an information point of view, it is also too complex to weigh up all the different options. bis central bankers ’ speeches although we like to assume our economic models are rational and omniscient, this is certainly not the case in reality. it would be more accurate to describe our world as having bounded rationality and imperfect information. simple rules are a way of reducing a complex problem with many unknowns to simpler tradeoffs, like yes or no, above or below, or left or right. it ’ s as in traffic : in the vast majority of situations, driving on the correct side of the road is good advice. or reducing your speed in misty weather. if we can progress along the road of simplicity, i ’ m sure we can also stop the pace of regulatory expansion. as leonardo da vinci said, “ simplicity is the ultimate sophistication ”. simplicity and transparency can help restore the public ’ s trust in the financial sector. financial institutions can achieve this by switching to clear business models, with streamlined structures and a prudent mindset. if they do so, the amount of regulations to be complied with can be reduced and the remaining regulations can be simplified, if and where applicable. in addition, simple rules can help us focus on key risks, as well as forming a guide for the future. greater trust, increased transparency and less complex risks will ultimately make the overall financial system more robust. and that in turn will make it easier for central banks to promote financial stability. thank you! bis central bankers ’ speeches

n., and e. nelson, ( 2001 ), ” optimal horizons for inflation targeting ”, journal of economic dynamics & control, 25, 891 - 910. see footnote 2 for details. ” monetary policy in sweden ” replaces the clarification of monetary policy published in 1999, see heikensten, l. ( 1999 ), ” the riksbank ’ s inflation target – clarifications and evaluation ”, sveriges riksbank quarterly review, 1999 : 1, 5 - 17. in this context, let me also mention something about risks. more specifically, the risks connected to rising asset prices and credit expansions. this is a question that has been much discussed in recent years, both between central banks and within the academic world, as house prices have risen rapidly in many countries including sweden. this debate could in itself be the topic of a speech so let me just briefly say that the position of the riksbank is that we do not consider it to be reasonable to entirely ignore these risks, even though it might be difficult to take these risks into account in the usual forecasting process. we have therefore acted to reduce these risks and to contribute to a calmer adjustment in house prices. the inflation forecast and future interest rate developments one of the recent changes in our strategy was the assumption regarding the development of the policy rate, which is used as a base for our forecasts. like most central banks with an inflation target, the riksbank previously made forecasts under the assumption that the policy rate would not change during the forecast period. since october last year we instead use an assumption that has gained in popularity among central banks, namely that the policy rate will develop in line with market expectations, as reflected in implied forward rates. the earlier assumption had the advantage that it illustrated in a simple manner when there was reason to change the policy rate. if inflation two years ahead was expected to be lower than two per cent, this was a signal that the interest rate needed to be cut, and if it was expected to be higher, the rate needed to be raised. of course, this rule could not capture all of the nuances in the monetary policy considerations, but it provided a rough explanation of the monetary policy decisions. however, there were also disadvantages. in normal cases it is not, for instance, particularly realistic that the policy rate would remain unchanged a couple of years ahead. the fact that the forecasts were based on this assumption made it