The banks make payments between themselves via the central bank and they can borrow or deposit money there for the short run. The terms determined by the central banks for these transactions affect interest rate-setting and credit flows in the economy. This is what is normally referred to as “monetary policy” and receives considerable media coverage and space in the economic policy debate. Since the monetary policy regime of maintaining a fixed foreign exchange rate was abandoned at the beginning of the 1990s, the Riksbank – similar to many other central banks – has followed a strategy known as “flexible inflation-targeting”. This means that monetary policy is aimed at achieving a quantified inflation target, but this is done in a flexible manner. Deviations from the target are consciously accepted, normally in order to avoid unnecessarily negative effects on output and employment, but it could also be a matter of trying to avoid the build-up of financial imbalances. 19 Flexible inflation targeting can help to maintain financial stability. At the same time, financial stability is a prerequisite for being able to pursue a meaningful monetary policy, as monetary policy affects the real economy and inflation via the financial system. Financial instability very much inhibits effective monetary policy. Many would certainly agree that our flexible inflation targeting policy has led to favourable economic growth in Sweden. It has also in general received a good rating in the evaluations of the Riksbank performed by external experts on behalf of the Riksdag.
Improvements are urgently needed here so that we can tackle risks in good time and such procedures have also been recommended by the EU’s macroprudential policy body, the European Systemic Risk Board (ESRB). 16 Secondly, the Swedish structure falls short also when it comes to clarity in the division of responsibilities. Via its instruction, Finansinspektionen was given the responsibility to “take measures to counteract financial imbalances with the aim of stabilising the credit market”. No definition of what Finansinspektionen’s overall macroprudential policy task comprises has been formulated, however. This problem is highlighted by the decision process for the upcoming amortisation requirement. The Government has indeed tasked Finansinspektionen to produce regulations that more closely define the amortisation requirement but at the same time requires these regulations to be approved by the Government before Finansinspektionen adopts them. This is not in line with the ESRB’s recommendation that the macroprudential authority should as a minimum be operationally independent from political bodies. 17 The importance of independence when adopting macroprudential policy measures is also underscored by Goodfriend and King. This is, if anything, a return to the arrangement that often prevailed prior to the deregulations of the 1980s. A third problem with the Swedish macroprudential policy framework is that it has not been established by law. Finansinspektionen’s mandate in the macroprudential policy area is only a government ordinance and the Stability Council is formally only a committee.