The successful management of the so-called IT bubble at the beginning of the 2000s was regarded as an example of financial crises not needing to be particularly troublesome. What is clear today, but was not clear as recently as six years ago, is that this picture was far too optimistic. But then the crisis came along and turned most things upside down. Reassessment of the financial markets One obvious lesson from the crisis was that the financial markets were not functioning as well and as efficiently as we had believed. Instead of contributing to growth and stability in the economy through efficient risk spreading and credit allocation, they became a cause of  1  2  See for example Taylor (1998) and Bernanke (2004). BIS central bankers’ speeches  macroeconomic fluctuations. It became clear that the models on which policy decisions were based needed to be adjusted so that the financial markets no longer played the obscure role they had played prior to this. In recent years, there has been a dramatic increase in research on what are usually referred to as “financial frictions”, that is, mechanisms through which the financial system affects fluctuations in the economy (see Figure 1).2 One might wonder why this interest in the role of the financial markets did not arise earlier. The crisis that we in Sweden and some other countries suffered in the early 1990s also revolved to a great extent around credit booms and property market crashes.
The central banks became independent during a period that one might be able to call the “golden age” of inflation targeting, when everything looked relatively straightforward – when the policy rate was in principle set to attain price stability and when one took financial stability more or less for granted. The world that now appears to be emerging is more complicated. It is necessary to reconsider where the boundary lines should be drawn between what should be delegated to independent central banks and what should be managed by the political system. Finding the best way of doing this is one of the major challenges ahead of us. 17  See Gerlach (2013). Results from a study by Bech, Gambacorta and Kharroubi (2012) indicate that monetary policy is less efficient when it comes to counteracting a recession and contributing to a recovery after a financial crisis. Posen (2013) says that more powerful quantitative easing would have facilitated the recovery in the United Kingdom, but that the fact that this was not implemented has nothing to do with inflation targeting and it would not have been easier with a different type of monetary policy. 18  See, for example, Banerjee, Cecchetti and Hofmann (2013). Whelan (2013) says that inflation targeting should actually be abandoned in favour of a solution where the central banks are given a broader mandate and more instruments at their disposal.