Svensson also took up the possibility, as a last resort and in a hypothetical situation with a zero interest rate and very low inflation expectations, of introducing a temporary exchange rate target to bring up inflation expectations. This method would involve first introducing a price level target and then depreciating the currency to attain this price level target. It would in theory make inflation expectations rise and inflation accelerate. The real interest rate would therefore be lower, which would stimulate production and employment. My own opinion is that the Riksbank should not even temporarily hold the krona exchange rate at an artificially low level. When the repo rate is cut, this normally means that the krona weakens. But the current weakening of the krona began back in August last year before the repo rate cuts were made and ought mainly to be due to the financial crisis. There are primarily three reasons against temporary interventions to keep the krona at a low level. The first is that there is no reason to do this, as underlying inflation and inflation expectations are close to 2 per cent. The second reason is that the current problem is that this is a global crisis and all countries cannot depreciate their currencies at the same time to stimulate production and push up inflation. The third is that our experiences of trying to solve problems by depreciating the currency are not positive.
The central banks have also cut policy rates rapidly and forcefully, sometimes in coordinated actions, to alleviate the repercussions of the financial crisis on production and employment. Governments have offered guarantees and capital injections to reduce the risk of further bankruptcies in the banking sector. Several countries have also decided on large fiscal policy stimulation packages. 2  BIS Review 25/2009  The measures taken by central banks and governments around the world so far have contributed to reducing the pressure on the interbank markets. Without these measures the financial markets would probably have ceased functioning entirely. One sign that the crisis is no longer as acute is that the TED spreads have fallen in Sweden, as well as the United States and the euro area. The spreads are now back at around the same levels that prevailed immediately prior to the worsening of the crisis in 2008. But the financial markets are still functioning much less efficiently than normal. It is also still difficult for companies to finance themselves in the capital market. The Riksbank has also implemented a large number of unconventional measures to safeguard financial stability and mitigate the negative effects of the financial crisis. During the second half of 2008 the Riksbank increased its lending to the banks by more than SEK 450 billion. Almost SEK 200 billion of this was comprised of loans in US dollars. We have largely financed this through a swap agreement with the Fed.