The fall in risk premiums meant that the effect on asset prices were more important than what the changes in the risk free rate alone would suggest. While low risk premiums, taken at face value, signal a healthy economy, many supervisors and central banks were concerned that risk premiums had fallen too far. As we all know, risk premiums in credit market rose dramatically this summer. Uncertainty over the value of US subprime mortgage backed securities then ignited a furious “flight-to-quality”, which actually seized up important segments of the money market. It is too early to tell what the permanent outcome of these events will be. However, it is clear that if they signal a return to higher risk premiums and tighter credit conditions, asset price inflation is likely to slow down. The area where the current regime of low interest rates and small risk premiums has had its most marked impact is probably that of residential property and household debt. The rise in house prices the last ten years have indeed been unprecedented in duration, magnitude and synchronisation across countries. In Sweden, this has caused a substantial amount of public concern, and an often asked question is if there is a significant overvaluation in the housing market and if the households are overly indebted. Answering these questions is a daunting task, and requires an educated opinion on the equilibrium price of residential property and on the optimal level of household indebtedness.
The last decade has seen strong global economic growth, while, at the same time, output volatility have dropped. In practice, two paths have emerged for achieving price stability. One way is through a fixed exchange rate regime, such as a currency board. Under such an arrangement, a country simply imports the monetary policy of a country with a highly credible low-inflation regime. This path has emerged as the weapon of choice of many emerging economies. These countries want to achieve price stability, while avoiding the costly deflations which otherwise might be necessary to anchor inflation expectations. The other way is through an independent central bank with a mandate to maintain price stability. This mandate is often formulated in terms of an inflation target. The inflation target operated by the Swedish Riksbank stipulates that consumer price inflation should be 2 per cent per year, with a tolerance interval of plus/minus 1 percentage point. For all practical purposes this arrangement is close to what is found in, for example, the UK, Australia, Norway and the Eurozone. It should also be said that there is a general consensus that the inflation target in Sweden has been a successful one. Financial stability As I mentioned earlier, many central banks today also have an objective to promote financial stability. While there is close to universal agreement on what price stability means, there has yet to emerge, some attempts none withstanding, a consensus on a working definition of  BIS Review 101/2007  1  financial stability.