a number of attractive features. they assume that central banks can appropriately pay attention simultaneously to developments in both output and inflation, provided their reactions occur in the context of a longer - run goal of price stability and that they recognize that activity is limited by the economy ’ s sustainable potential. as taylor himself has pointed out, these types of formulations are at best “ guideposts ” to help central banks, not inflexible rules that eliminate discretion. one reason is that their formulation depends on the values of certain key variables - - most crucially the equilibrium real federal funds rate and the production potential of the economy. in practice these have been obtained by observation of past macroeconomic behavior - - either through informal inspection of the data, or more formally as embedded in models. in that sense, like all rules, as i noted earlier, they embody a forecast that the future will be like the past. unfortunately, however, history is not an infallible guide to the future, and the levels of these two variables are currently under active debate. the mechanics of monetary policy that i have been addressing are merely means to an end. what are we endeavoring to achieve, and why? the goal of macroeconomic policy should be maximum sustainable growth over the long term, and evidence has continued to accumulate around the world that price stability is a necessary condition for the achievement of that goal. beyond this very general statement, however, lie difficult issues of concept and measurement for policymakers and academicians to keep us occupied for the next fifteen years and more. inflation impairs economic efficiency in part because people have difficulty separating movements in relative prices from movements in the general price level. but what prices matter? certainly prices of goods and services now being produced - - our basic measure of inflation - - matter. but what about prices of claims on future goods and services, like equities, real estate or other earning assets? is stability in the average level of these prices essential to the stability of the economy? recent japanese economic history only underlines the difficulty and importance of this question. the prices of final goods and services were stable in japan in the mid - to - late 1980s, but soaring asset prices distorted resource allocation and ultimately undermined the performance of the macroeconomy. in the united states, evaluating the effects on the economy of shifts in balance sheets and variations in asset prices has been an integral part of the development of monetary policy. in recent years, for example, we have ex

accordingly proposed to apply only to commitments that are made after the guarantee has been issued. in this way, a bank ’ s losses are to be carried in the first place by its shareholders and after them by the creditors whose claims pre - date the decision to impose public administration. a basic principle in the management of the swedish banking crisis was just that no compensation would be provided for shareholders if government funds were needed to cope with a bank ’ s problems. this was important, of course, with a view to future moral hazard problems but it was also crucial politically. otherwise it would hardly have been possible to obtain political support for the public funds needed. the unwillingness to adopt an equally strict approach in many asian countries has presumably been a major factor behind the difficulties in dealing with the problems there. the central bank ’ s primary function in this context is to provide emergency lending for acute needs in order to avoid a systemic crisis and aid the work of the new authority. the experience from bank crises clearly demonstrates the importance of incorporating such emergency lending in the general structure for crisis management instead of treating it as a separate measure. this has to do with the great difficulty in practice of distinguishing between liquidity support and support motivated by problems with solvency. at the riksbank we have made very concrete preparations in this field. we have, for example, produced manuals specifying who is to do what and how in various conceivable crisis situations. before turning to monetary policy, permit me finally to underscore that i am well aware of the difficulties of various kinds, not least of an institutional and political nature, that exist at the european level when it comes to composing a clear set of rules of this type. at the same time this conference has strengthened my belief that a development towards a more integrated european banking system can be swift. the least we can do is to prepare ourselves on the national level. it will probably help us managing a crisis at the european level if one would emerge. monetary policy as i mentioned, the work of constructing a new policy with a flexible exchange rate had to start from scratch in the fall of 1992. but in a matter of months the riksbank had prepared a new target for monetary policy. the annual rate of cpi inflation was to be held at 2 %, with a tolerance interval of procedures to handle the same kind of problems exist in e g usa, england and norway. one percentage point up or down. the 2 % target roughly matched the prevailing rate and