another illustrative example. a current illustration was provided in last week ’ s financial times by the well - known economist frederic mishkin, who, among other research, carried out an assessment of swedish monetary policy a couple of years ago. mishkin emphasised the importance of making a distinction between different types of bubble. bubbles are dangerous when the underlying assets are used as collateral and fuel an excessive credit boom. however, this is not the situation in the world today. on the contrary, the banks are shrinking their balance sheets and tightening their credit conditions. thus the asset price increases that we are currently seeing in a number of countries hardly constitute a serious problem. sooner or later, bubbles burst and, sooner or later, financial imbalances are corrected. the problem is that it is very difficult to predict exactly when this will happen. as we know, asset prices can increase relatively rapidly for many years, perhaps as long as a decade, before a bubble arises and bursts. individuals expressing concern over the build - up of worrying financial imbalances are often regarded as whining pessimists who have failed to realise that times have changed and that there is no danger this time. i ’ m sure we all remember the “ new economy ” that everybody was talking about during the build - up of the it bubble. technological developments had boosted long - term global growth to higher levels, which was reflected in asset prices. has anybody forgotten what happened next? however, as has been said, no serious macroeconomic problem ever arose from the it bubble, as it was not funded by loans. when the correction of a bubble finally takes place, it generally has extensive real economic effects, particularly, of course, if it has been funded by loans. the stock exchange drops sharply, even if no great over - valuation has initially been present on the stock market itself. economic uncertainty and the drop in asset prices mean that consumption and investments become heavily subdued. risk aversion among financial investors increases and the price of risk, credit spreads, increases. the banks suffer increasing loan losses as the value of collateral falls and more and more borrowers find that they cannot make repayments. in the worst case, the negative interaction between the financial markets and the macroeconomy escalates into a financial crisis in which loan losses become so comprehensive that parts of the banking sector face problems surviving. when a bubble bursts, prices can fall by up to 50 per cent or even more, depending on the

in utilising information technology. in order to reap the full benefit of this and go on enjoying the combination of high growth and low inflation, it is essential that the right driving forces and conditions are in place. it is important that these matters are discussed, particularly as one cannot expect the economy to transform itself automatically. we have made good progress in recent years by establishing macroeconomic stability, with sound government finances and stable prices. efficient wage formation and a financial system that functions properly are other important pieces. the fact that i have concentrated on these two factors this evening should obviously not be taken to imply that they are all that is needed to complete the puzzle.