Positive and negative risks can have different costs There are also other cases where it may be a mistake to let monetary policy be guided by forecasts alone. A forecast-based monetary policy is good if it is believed that the costs of negative deviations from the target are the same as for positive deviations, but this is not always the case. Greater importance should be attached to a scenario in which the collapse of an asset bubble leads to a state of deflation that is difficult to escape from than to a scenario with high inflation, assuming that the inflation target still has credibility. Experience from Japan in the 1990s illustrates this. During the financial crisis, there were discussions in the Executive Board9 about temporarily allowing inflation to be relatively high with the aim of pushing up inflation expectations, which would lead to lower real interest rates and a wellneeded stimulation of the economy. Stimulating the economy with lower nominal interest rates was not possible as the Riksbank had already reduced the repo rate as far as was considered possible. I was doubtful about experimenting with our monetary policy framework in this way during an ongoing crisis. I admit, however, that there is a certain logic in the argument that underlines the fact that it is sometimes more costly for inflation to become too low than for it to become too high. However, if the credibility of the inflation target is threatened by high inflation then the reverse may also be true.
Another point that I usually make is that it can be difficult to draw monetary policy conclusions from our forecasts as they only cover a limited forecast horizon of three years. A certain repo-rate path may appear to provide better target attainment than other paths over this limited forecast horizon but could well lead to poorer target attainment beyond it. It is therefore desirable when making monetary policy decisions to take into account the possible state of the economy beyond the forecast horizon, even though it is difficult to do this in terms of quantified forecasts. One way to do this is to choose a repo-rate path that provides good target attainment at the end of the forecasting period but does not entail serious tendencies towards poorer target attainment beyond the forecast horizon. Even though we have a limited forecast horizon, the monetary policy decisions must also to some extent look ahead to what can happen afterwards. The development of house prices and household indebtedness could, for example, entail risks that materialise beyond the current forecast horizon, especially if monetary policy remains far too expansionary for far too long. The question of whether risks of this type should be considered in the monetary policy decisions has been widely debated. One view is that such risks should already be taken into account in our standard quantified forecasts.