The Riksbank now publishes a twice-yearly report analysing the stability of the Swedish financial system. In a crisis situation, the central bank plays a very important role. It may then need to go in and act as lender of last resort, that is, to grant emergency liquidity assistance (ELA) to banks and financial companies if this is considered necessary to prevent the financial system from collapsing. The two objectives of price stability and financial stability are related to each other in different ways, in addition to both being important components of an efficient payment system. The stability of the financial system is of course a necessary condition for a policy aimed at price stability, as the latter is fairly meaningless if the country is threatened with economic collapse. The financial stability objective can therefore in one sense be said to be superior to the objective of price stability. At the same time, it is very probable that price stability in the long run promotes financial stability, for instance, by making the price system function better and thereby reducing the risk of bad investments. However, price stability is no guarantee of stability in the financial system, which is illustrated, for instance, by the problems in the Japanese banks at the beginning of the 1990s. There is thus no reason for central banks to focus solely on the price stability objective and thereby assume that financial stability will follow automatically – both objectives are important. Other objectives than price stability and financial stability?
High and fluctuating inflation, on the other hand, disrupts the signalling function of the pricing system and can more easily lead to bad economic decisions. In an environment with low inflation, the price system can do a better job in allocating resources to uses where they will do most good. In a broader sense, one could see an efficient pricing system as part of an efficient payment system – it ensures that the transactions made are based on the best information possible. Price stability can also be justified for reasons not immediately connected with the efficiency of the payment system, such as the fact that high and fluctuating inflation tends to give rise to undesirable distribution effects. For instance, inflation appears to hit poor people hardest as the rich usually have better opportunities to protect themselves, or even to benefit, from the effects of inflation. 2 This could be because, for instance, poor people often have no other opportunity than to retain a large part of their limited assets in the form of money or because they are to a greater extent than the rich dependent on public subsidies that are not fully indexed. Keeping inflation low and stable is currently the most obvious – and definitely the most noticed – task for modern central banks. The reason for the focus on price stability is of course the negative experiences of the high and fluctuating inflation many countries experienced in the 1970s and 1980s.