not been debated as much as the question of how to act prior to this. leaning against the wind – act sooner, not just later … this debate has previously been somewhat “ polarised ” between two stances – to “ lean against the wind ” or to “ clean up afterwards ”. the former stance involves the central bank raising its policy rate if property prices and lending increase at an alarming rate, even if an interest rate increase is not obviously justified on the basis of the forecasts for the real economy and inflation. one usually says that the central bank should “ lean against the wind ”. the basic idea is that keeping the policy rate higher than it would otherwise have been contributes to holding back the rise in property prices and ensuring that the fall in prices that comes sooner or later is much milder. a more balanced development in property prices also leads to more stable developments in the real economy and inflation. although growth may be slightly lower in the upturn phase, there is on the other hand less risk that property prices will fall dramatically later on, which could contribute to a severe downturn. this is in some ways similar to an insurance policy : by accepting slightly weaker growth in the short term, one reduces the risk of much more negative developments further ahead. however, the strategy of “ leaning against the wind ” is not entirely without problems, even if it may sound fairly simple. many economists have criticised this strategy. the main critics considered, at least prior to the crisis, that although it may indeed involve an imbalance, the best strategy was for the central bank to confine itself to “ cleaning up afterwards ” once the bubble had actually burst. in their view, “ leaning against the wind ” often would not lead to more stable developments, but instead risks amplifying fluctuations. three main arguments have been raised by critics against the policy of “ leaning against the wind ”. difficult to identify a bubble and to do so in time? to begin with, it must be possible to identify the imbalance or potential bubble and to do so at a sufficiently early stage. the critics claim that this is very difficult and they often use the term “ bursting bubbles ” when talking about monetary policy and asset prices. the idea of bursting a bubble has much more dramatic associations than the expression “ leaning against the wind ”. if the developments that are judged to be unbalanced are actually justified by the fundamental driving forces, then a higher interest rate would curb growth unnecessarily. it could

lars nyberg : monetary policy and house prices speech by mr lars nyberg, deputy governor of the sveriges riksbank, at the swedish investment fund association, stockholm, 19 may 2010. * * * i would guess that all of us here have at least two things in common. one is that our professional life in recent years has largely revolved around dealing with the effects of a global financial crisis. the other is that we would rather not do it again. most of you represent the investment fund branch or unit trust investors in one way or another. and a reasonable guess is that recent years have been turbulent for many of you. it is fairly natural that the riksbank should have been in the eye of the storm during the crisis. our main tasks are to safeguard financial stability and to keep inflation low and stable, at the same time as contributing to stabilising production and employment. managing the effects of the crisis and carrying out our statutory tasks in the best possible way has required a number of creative and unusual solutions. and it is not all over yet. the financial markets have recently been shaken up once again. now the problem is mainly due to greece, but to some extent also other eu countries such as spain and portugal, having serious problems with their government finances. the swedish banks are not directly exposed to the countries in southern europe to any great extent. however, this does not mean they will not suffer contagion effects via the financial markets. two weeks ago, the eu member states and the international monetary fund presented an aid package worth a total of eur 750 billion to bail out eu countries with serious budget problems. at the same time, the european central bank decided to make support purchases of government bonds. hopefully, this will be sufficient to create and maintain confidence that the countries which have been hardest hit will actually be able to get their public finances on an even keel again. we will be following these developments very closely. now, however, i am not intending to talk about the most recent financial market turmoil. what i intend to spend the next half hour or so talking about is an old debate theme that has been given new life during the crisis ; should central banks use the interest rate to try to influence asset prices and credit growth? should they try to prevent or alleviate imbalances that begin to grow, or wait until the bubble has burst and it is time to clean up the mess it has left behind? the crisis has changed many people ’ s views on