All of these factors may permanently lower the path of potential output. As I said in the fall of 2010 and I repeat the message again today: I think state-contingent policies such as those I just described are a productive way to provide such necessary monetary accommodation. There is simply too much at stake for us to be excessively complacent while the economy is in such dire shape. It is imperative to undertake action now. References Christiano, Lawrence J., Martin Eichenbaum and Charles L. Evans, 2005, “Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy”, Journal of Political Economy, February, Vol. 113, No. 1, February, pp. 1–45. Chung, Hess, Jean-Philippe Laforte, David Reifschneider and John C. Williams, 2010, “Have We Underestimated the Probability of Hitting the Zero Lower Bound?”, at the conference, Revisiting Monetary Policy in a Low Inflation Environment, Federal Reserve Bank of Boston, October 13. Eggertsson, Gauti, and Michael Woodford, 2003, “The Zero Bound on Interest Rates and Optimal Monetary Policy”, Brookings Papers on Economic Activity, Vol. 34, No. 1, pp. 139–211. Federal Open Market Committee, 2011, Minutes of the Federal Open Market Committee, January 25–26, Board of Governors of the Federal Reserve System, February 16. Krugman, Paul R., 1998, “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap”, Brookings Papers on Economic Activity, Vol. 29, No. 2, pp. 137–206. Reinhart, Carmen M., and Kenneth S. Rogoff, 2009, This Time Is Different: Eight Centuries of Financial Folly, Princeton, NJ: Princeton University Press.
Karolina Ekholm: Do global imbalances pose a risk to the Swedish economy? Speech by Ms Karolina Ekholm, Deputy Governor of the Sveriges Riksbank, at the Stockholm Chamber of Commerce, Stockholm, 13 June 2011. *  *  *  The views expressed in this speech are my own and are not necessarily shared by the other members of the Riksbank’s Executive Board or the staff of the Riksbank. I would like to thank Hanna Armelius for all her help in writing this speech. Financial crises often come as a surprise. After the event, however, it may be a simple matter to look back and see all the flashing warning lights that should have signalled that things were about to go seriously wrong. I do not think many people realised how vulnerable the global financial system really was before the latest crisis, and consequently this crisis came as a surprise too. However, there were people who did see warning lights flashing. The problem was that they appeared to be flashing for a different type of crisis than the one that eventually arrived. What we expected to arrive was an international crisis triggered by a collapse in the real value of the dollar. 1 The warning lights began flashing due to the major global imbalances arising from the fact that that some countries, above all the United States, had substantial and persistent current account deficits while others, for example China, had substantial and persistent current account surpluses.