it. but what exactly do we mean by “ normal ”? this leads me to the next question. is the policy rate higher on average if inflation in general is relatively high than if it is very low? as i have already mentioned, the interest rate consists, somewhat simplified, of a real part and a part that is compensation for inflation. 6 in a world with a very low average inflation rate, interest rates in general – the normal situation – will be lower than in a world where inflation is on average higher. as i just pointed out, one reason why interest rates are lower now than during the 1980s, for instance, is that inflation has fallen. a lower inflation rate was indeed what the introduction of inflation targeting was meant to achieve. but it is not only a too high inflation rate that is problematic, a too low inflation rate can cause problems as well. let us assume that inflation in one country is on average 2 per cent, while in another it is on average 0 per cent – one can assume, for instance, that they have different inflation targets. the interest rate in the first country will therefore be 5 the examples i use focus on the central bank's policy rate, but the reasoning can be extended to include more long - term interest rates. unconventional monetary policy in the form of asset purchases works partly by lowering long - term interest rates. 6 this correlation is described by what is known as the fisher equation, named after the american economist irving fisher, who is renowned for his works on the theory of interest and debt deflation during the first decades of the 20th century. the fisher equation is expressed by the formula i = r + π, where i is the nominal interest rate, r the real interest rate and π is inflation. 4 on average 2 percentage points higher than that in the second country, as those borrowing money do not need to pay any compensation for inflation if it is zero. let us now assume that a recession occurs in both countries, and the respective central banks need to cut their policy rates. let us also assume that real interest rates are at record low levels, as is the case today, and that the neutral level of the policy is therefore already low. the second country has less scope to cut its policy rate than the first one. when the policy rate in the second country reaches its lower bound, the first country still has 2 percentage points at its disposal. in other words, it is not possible to make monetary policy as expansionary in the country where

falling interest rates, perhaps combined with greater predictability as to how interest rates and inflation will develop in future, explain a large part of the increased willingness to borrow. one can thus say that households ’ growing debt burden is to some extent a natural consequence of the successful inflation - targeting policy pursued over the past decade. as i see it, it is reasonable to assume that we are heading towards a new equilibrium, where households have adapted their borrowing to what they perceive as a lower long - term level for interest rates, although it is not yet possible to say when we will reach this stage. there is still a possibility that households are underestimating the uncertainty of future trends and therefore borrowing more than would correspond to a long - term equilibrium position. in sweden, as in many other countries, households have primarily borrowed in order to buy accommodation, which has led to house prices rising at roughly the same rate as the borrowing. the question now is whether there is reason to take this development into account in monetary policy decisions. a strictly - applied inflation - targeting model would not take this into account, and there is no mention of it in the monetary policy clarification published in 1999. the general problem is whether low inflation can make various asset prices, such as equity prices or house prices soar way beyond what is reasonable and if so, what monetary policy can do to remedy this. should the repo rate be used to slow down this development to try to prevent prices becoming so high that the fall, when it actually comes, will be too fast and too far? there are many examples of how the air has gone out of asset markets and thereby triggered or aggravated a downswing in economic activity. or is it more reasonable to wait until the “ bubble ” has burst and then try to counteract the effects the best one can? this question is neither a simple one nor a new one. it is discussed by central banks around the world, whether or not they have specific inflation targets. and there is hardly a clear - cut answer. as i see it, the seriousness we in sweden should attach to households'increased debt burden is closely connected with how we assess price trends in the housing market. although there has so far been a large rise in prices, particularly in metropolitan areas, we have not seen the clearly speculative tendencies apparent in other markets, for instance australia and the united kingdom. in sweden we still usually buy housing to live in it ourselves. in some other countries, where the tax legislation and