Asset prices are, however, taken into account in a regime that explicitly targets inflation in terms of the consumer price index or a variant of this. This occurs via household wealth effects and corporate capital costs, which influence total demand, alter the output gap and thereby modify inflation prospects. If asset prices rise so strongly that, via increased demand, inflation tends to rise above the targeted rate, the central bank will normally respond by tightening the monetary stance. Conversely, the monetary stance will be eased if asset prices fall so much that inflation is liable to be below the target. Thus far the analysis is fairly straightforward. Even if asset prices do not feature explicitly in the target variable, they will be taken into account in a monetary policy model that targets the consumer price index. Sweden had a combination of high inflation and rising asset prices in the 1980s. It might then be argued that policy failed to concentrate on price stability in terms of the consumer BIS Review 58/1998  -5-  price index. It should be noted that with the fixed exchange rate regime at that time, the overheating in the economy was primarily a matter for fiscal policy. Price bubbles developed in asset markets, followed later by price falls for shares and real estate, for example. This in turn led to the severe bank crisis. But can the Swedish bank crisis be explained simply in terms of an insufficient focus on price stability?
But it would be disappointing if that debate degenerates into recrimination and antagonism. That would be to obscure the remarkable consensus that now exists - throughout the European Union and indeed more widely, and across a broad spectrum of political opinion within the countries of Europe, including this country, on the broad approach to macro-economic management. This unforced consensus extends to monetary policy directed to price stability, and it extends to budgetary policy directed to medium and longer-term fiscal sustainability. There is growing recognition, too, across the continent, of the importance of structural policy directed to supply-side flexibility. This strengthening consensus is fundamentally important - more fundamentally important, in terms of the economics of it at least, than whether these common objectives are pursued inside or outside the framework of monetary union. Pulling these thoughts together, it would be a mistake in my view for monetary union to go ahead without reasonable confidence of genuine, sustainable, convergence between its members; and it would be a mistake for any individual country to seek to join, or to be permitted to join, unless it had achieved genuine, sustainable, convergence. If there are serious doubts - generally or in any particular case - it would be in no-one’s interest to proceed. But it would be just as big a mistake, if monetary union does not go ahead, or for countries on the outside, if individual governments saw that as an opportunity to seek to take short-term advantage of the apparent macro-economic freedom that that gave.