Another culprit is high subsidies provided by many governments in the developing world to at least partially protect consumers from the cost of high food and energy prices. Fast-forwarding to the recent period, the observation that the central banks of developed countries still keep real interest rates negative in the face of financial risks may hamper a correction in commodity prices. On the other hand, many developing countries, mainly China, India, Malaysia, Indonesia, and Egypt have decided to gradually reduce subsidizing energy prices and pass the true cost to consumers. This is a favorable development that will eventually help to control demand pressures on commodities. Dear Guests, As you may all know, the commonly accepted practice in inflation targeting regime is that monetary policy should not react to supply-driven shocks that are temporary in nature and should allow temporary increases in inflation in the short-term, unless they create deterioration in inflation expectations. Otherwise, undesired fluctuations might arise in economic activity and relative prices. The increase in commodity prices would trigger a selfcorrecting mechanism. By changing the relative prices, it would provide valuable information on how the resources of the economy should be distributed. While high food and energy prices curb consumption on these products, they would also encourage investment and increase supply in the long-term. In short, the common view is that central banks have nothing to do but wait for the supply-driven shocks to work out their natural course.
Lars Heikensten: Reforming a central bank Speech by Mr Lars Heikensten, First Deputy Governor of the Sveriges Riksbank, to the CEPR/SNS Roundtable, Stockholm, 8 June 2001. *  *  *  Thank you for inviting me this evening and for the opportunity of addressing you all. I should like to begin by stressing how much we value the cooperation with CEPR. Creating arenas for an exchange of ideas in Europe is an important task to which CEPR is making a valuable contribution. Today you have been considering a variety of issues and this evening I want to raise yet another, namely how a central bank can be reformed. I do so against the background of the major changes that are currently taking place in our national economies and financial markets. These changes clearly have consequences for the work at central banks. The challenges we in Europe face are particularly great, above all now that EMU is a reality and the single currency imposes new requirements. Work on changes at the Riksbank has been very intensive in recent years and I should like to tell you something about it. What I have to say will no doubt be familiar to many of you in managerial positions in either the private or the public domain. The operations of central banks are really not all that different from those of other enterprises. Issues recur but methods have changed a lot Sveriges Riksbank is the world's oldest central bank. Threadneedle Street's Old Lady is our younger sister.