This has fuelled a debate as to whether monetary policy should give weight to developments in property and credit markets beyond their impact on consumer price inflation, and react in a precautionary manner to prevent an excessive surge in asset prices. Surely, expansionary monetary policies have contributed to the rise in property prices and debt accumulation. Asset prices generally will react to changes in short-term interest rates, but one would expect such movements to more or less even out over the cycle. But more fundamental forces have also been at play. First, the neutral real interest rate has probably fallen substantially over the past 5-10 years, maybe as much as 2 percentage points. Such a fall in the discount factor should have a large impact on asset prices like property and land. Second, Norway has recently experienced very strong, positive income shocks. For capital and labour that flow freely across borders, prices primarily reflect global growth and competitive conditions. The price of fixed capital, such as land, however, will be influenced by expected future income in a country. In periods with sharp increases in income and income expectations we would therefore expect land prices to rise at a faster pace than other prices. This is a real economic effect, which monetary policy over time cannot eliminate. It is very difficult to establish whether rapidly increasing asset and house prices are bubbles, or whether the price increases are driven primarily by economic fundamentals.
In a speech two weeks ago, British Prime Minister Gordon Brown proposed a new role for the IMF: “…its role should be to prevent crises and not simply manage or resolve them as in the past. And in a wider role the IMF, working with the global financial stability forum, should be at the heart of what we need – an early warning system involving regulators and supervisors in all countries for financial turbulence affecting the global economy.” 4  3  Financial Times January 26, 2008. 4  Speech at the Chamber of Commence in Delhi, 21 January 2008. BIS Review 14/2008  3  Obviously, there are pipelines that are not on our present maps. Also, our knowledge of what flows through the known ones is scarce. But would it help us if we knew? Would we be able to predict a looming crisis and thus prevent it? I do not have the answer to this, but I think it is fair to raise the question. We must expect turmoil in financial markets to occur from time to time. There will always be stupidity and greed, fear and euphoria (and some scoundrels). Accidents will happen. Authorities should strive to establish regulatory frameworks that give the right incentives for prudent behaviour. It is important to avoid overregulation that severely restricts markets and stifles innovation. We must of course make sure that obvious shortcomings in existing regulations are corrected.