the wind, ” in order to, everything else equal, reduce the output gap and thereby leverage and the probability of a financial crisis. however, the introduction in woodford ’ s model of financial - stability instruments such as capital requirements, possibly cyclical ones, would allow leverage to be controlled more directly than indirectly and bluntly by the policy rate via the output gap. monetary policy would be free to focus on stabilising inflation and the output gap and need not lean against the wind. in the realistic case when the state variable affecting the probability of a financial crisis is a vector that includes not only leverage but, for instance, maturity mismatch and liquidity mismatch, it is even more the case that additional financial - stability instruments such as restrictions on maturity and liquidity mismatches are superior to the policy rate in achieving and maintaining financial stability. bis central bankers ’ speeches for many years for several reasons, including global imbalances, fiscal policy, and shocks to aggregate demand and supply. this confusion means that the conclusions from this work for monetary policy are not clear. monetary - policy instruments the standard monetary - policy instruments are the policy rate and communication, including statements and the publication of forecasts of inflation, the real economy and ( by some central banks ) the policy rate. during the financial crises, in particular when the policy rate is at or close to the zero lower bound, we have seen other more unconventional instruments being used to implement more expansionary policy, as noted above. there is a lively debate and a considerable body of research on the effects of the lsaps undertaken by the federal reserve. estimates based on a number of recent studies, as well as federal reserve estimates, suggest that, all else equal, the federal reserve ’ s qe2 program launched in november 2010 lowered longer - term interest rates by 10 to 30 basis points. federal reserve analysis further indicates that a reduction in longer - term interest rates would be roughly equivalent in terms of the effect on the economy to a 40 to 120 basis points reduction in the federal funds rate ( bernanke 2011b ). this is a large reduction in the federal funds rate. in frb / us simulations discussed by yellen ( 2011 ) and reported by chung, laforte, reifschneider and williams ( 2011 ), qe2 is assumed to lower 10 - year yields by about 15 basis points, which reduces the unemployment rate by about 0. 3 percentage points and increases core pce

mr heikensten speaks on monetary policy with a focus on exchange rate speech by the deputy governor of the bank of sweden, mr lars heikensten, to riksbank ’ s primary dealers in stockholm on 19 april 1999. since november 1992, when the defence of the krona ’ s fixed exchange rate was abandoned, much of the discussion concerning monetary policy has involved the exchange rate. at this traditional meeting with the riksbank ’ s primary dealers, i should like to consider four issues connected with sweden ’ s currency. one of these issues is the function of the krona in a monetary policy regime that targets inflation with a flexible exchange rate. another issue is the actual path of the exchange rate in recent years and the conclusions it warrants. the euro ’ s introduction at the beginning of january has revived the question of sweden ’ s participation in emu ; this raises the other two issues, namely the process towards erm membership, if this is envisaged, and aspects of setting the future erm rate that would then ensue. monetary policy significance of the exchange rate the floating exchange rate regime that was introduced for the swedish krona in november 1992 was regarded by many people as a fairly temporary arrangement. they considered that for sweden, as a small country dependent on foreign trade, a fixed exchange rate was most advantageous, so the riksbank ought to try to reintroduce a fixed rate regime as soon as possible. since its introduction in 1993, however, the inflation target has proved to be a good compass for achieving and maintaining price stability. confidence in the monetary policy regime has gradually grown and now seems to be firm. inflation and inflation expectations are low. since the cyclical upturn in the summer of 1993, annual gdp growth has averaged almost 3 per cent, government finances have been rapidly consolidated and sweden has begun to repay external debt. important forecasting variable during lengthy periods of financial unrest and problems with confidence in sweden ’ s economy the riksbank judged that the krona was undervalued. at times, moreover, the exchange rate fluctuations have been relatively marked, even after it seemed that economic policy ’ s credibility had been established. in the period since the fixed exchange rate was abandoned the riksbank has not targeted the exchange rate. for monetary policy, the primary consideration since 1992 has been the picture of inflation prospects in relation to the targeted rate of 2 per cent. but the exchange rate is still one important factor in the