Where do central banks go from here? Lars E.O. Svensson Sveriges Riksbank Panel discussion, Norges Bank Symposium on What is a Useful Central Bank? November 18, 2010 1 1

Background The financial crisis was caused by other factors than monetary policy MP and financial-stability policy (FSP) are distinct and different – it was FSP that failed, not MP FSP and MP: Distinguish according to (1) objectives, (2) instruments, and (3) authority in charge Financial stability (FS) as an objective of MP makes little sense – but makes sense as an objective of the central bank, if the central bank has the suitable instruments

Monetary policy after the crisis Flexible inflation targeting (FIT) is fine – before, during, and after the crisis But greater role for financial conditions in transmission mechanism FS may imply restrictions on MP – rare event Normally, handle FS w/ FSP, not w/ MP (principle of comparative advantage) Do not use MP to target housing prices FIT with mean squared gaps (MSGs) – another step towards increased transparency

Monetary policy with mean squared gaps Norges Bank, March 2005 0,0 2,0 4,0 6,0 8,0 02 03 04 05 06 07 08 Main Low High 0,5 1,0 1,5 CPI-ATE Output 3,0 -2,0 Alternative policy-rate paths Percent, quarterly averages Mean squared gaps Annual percentage change Output gap Percent