A serious problem for the Japanese authorities was that the Bank of Japan was granted independence not long before it became necessary for policy to be coordinated between MoF and the BoJ.18 Inevitably, the desire on both sides to respect the newly-won independence of the central bank came into conflict with the growing realisation that monetary policy was operating in a zero-interest rate environment. The clarity of communication about the objectives of monetary policy diminishes when it is no longer possible to identify clear and distinct responsibilities for the two institutions. A desirable long-term reform - central bank independence - led to short-term difficulties. 17  How large are these effects is an open question. The absence of a compelling general equilibrium theory of liquidity makes it difficult to produce reliable empirical estimates. For the purposes of the equivalence proposition the magnitude of the effect is irrelevant. 18  The legislation was published in 1997, and took effect in April 1998. 12  BIS Review 5/2004  VI. Conclusions  I am conscious that I have raised more questions than I have answered - perhaps that is what happens when you become a central banker. I hope I have not copied my room-mate at Harvard whose PhD supervisor wrote, “he chewed more than he had bitten off”.19 But the search for institutions that improve our ability to handle the two problems associated with public money - the impossibility and undesirability of committing our successors - is never ending, and our knowledge is limited.
Lars E O Svensson: Monetary policy with a zero interest rate Speech by Mr Lars E O Svensson, Deputy Governor of the Sveriges Riksbank, at SNS – Centre for Business and Policy Studies, Stockholm, 17 February 2009. The original speech, which contains various links to the documents mentioned, can be found on the Sveriges Riksbank’s website. *  *  *  The Riksbank conducts a policy of flexible inflation targeting, which aims to stabilise inflation around the inflation target and also to stabilise the real economy. To achieve this, the Riksbank sets the repo rate and publishes a forecast for the repo rate in the years ahead. The repo rate and the expectations of future repo rates that arise from the repo rate path affect market interest rates, which in turn affect aggregate demand and inflation. During the financial crisis, the functioning of the financial markets has deteriorated and the transmission mechanism from the repo rate path to inflation and the real economy has weakened. In order to improve the functioning of the financial markets and strengthen the link between the repo rate path, market rates, inflation and the real economy, the Riksbank has taken a number of special measures. 1 Although the discussion of monetary policy often focuses on the repo rate and the repo rate path, it is important to realise that it is the real interest rate and the real repo rate path that mainly affect aggregate demand, not nominal interest rates.