If the stability of one of these banks is threatened, it also entails a threat to the stability of the financial system as a whole. To this extent, one can say that we in Sweden have actually been dealing with macroprudential analysis for quite a long time. But this does not mean that there has been a ready-developed, fully-functioning framework for macroprudential policy. On the contrary, it is only fairly recently that the allocation of responsibility for macroprudential policy was made clear, and the framework that includes the Financial Stability Council, which had its second meeting a couple of days ago, was established. “Learning by doing” in macroprudential policy – as when inflation targeting was introduced The situation with regard to macroprudential policy today is in many ways like the situation when the inflation-targeting policy was introduced just over twenty years ago – a new type of policy is to be launched without really knowing how successful it will be. When we introduced the inflation-targeting policy in Sweden in 1993, there was not much guidance. Some countries, such as New Zealand, Canada and the United Kingdom, had introduced such a policy before us, but they in turn had not really had time to gain much experience. It was quite simply difficult to know how to conduct the new policy, where the interest rate should be used to steer inflation towards a quantified target – and to know how well it would succeed.
One-way intervention has potentially significant costs as well as benefits – costs which go well beyond the risk of substantial capital loss in the event of future exchange rate realignment. These include growing implementation problems, which are likely to be particularly acute in very open economies, and a potentially serious misallocation of domestic resources. It will not be in the interests of the Asian countries concerned to ignore these issues. That is why I find the so called Bretton Woods II hypothesis – or at least the proposition that Asian central banks will have a more or less open ended commitment to financing ever increasing US deficits – rather implausible, at least as a prediction of what is likely to happen in the medium term, rather than as a description of the past few years. It assumes the continuation of unsustainable policies, which are not in the interests of the countries concerned. I concede however, that it is hard to make a precise forecast about the timing of a policy shift in Asia. And it is worth bearing in mind that this may depend on global and regional political considerations as much as on economic and financial pressures. So given these uncertainties over the evolution of global imbalances, what should we do about them? There is clearly no case for turning the clock back and re-introducing the constraints that characterised the genuine Bretton Woods system.