In reality, the problem is further complicated by the fact that inflation must be stabilised. Here I assumed for the sake of simplicity that inflation would entirely follow the business cycle. As the credit cycle and the business cycle develop in different ways, a change in the repo rate intended to affect one cycle will sometimes have an undesired effect on the other. Although a stable credit cycle – one that does not “go wrong” – is ultimately necessary for a stable business cycle, in the short term it may be necessary to make a trade-off between them. This is not without its problems. An ambition to hold the credit cycle in balance may require a slightly higher policy rate. This would also dampen the economic cycle and inflation could undershoot the target. This can be regarded as normal and acceptable for a period of time. But if the period becomes prolonged, it may sooner or later become difficult to gain understanding and support for this policy – despite its purpose being to prevent a much worse development further ahead. This could be a dilemma. 8  One of many examples is Petterson and Hållö (2013). 9  It is not entirely clear how inflation will develop in connection with a recession. One possibility is that the krona would weaken substantially and that imported products would thereby become so much more expensive that one had a higher inflation rate in the short term.
This coincided with monetary policy being increasingly aimed at holding inflation in check. A growing number of countries had introduced explicit or implicit inflation targets and monetary policy had increasingly been delegated to independent central banks. Once inflation expectations had been anchored, it became easier to stabilise the real economy as well. Many felt that an important reason for the favourable developments in the world economy was that these changed enabled monetary policy to be conducted in a better manner than before. 1 Moreover, during the period prior to the crisis financial stability was increasingly being taken for granted. It was assumed that the financial markets were on the whole efficient and functioning smoothly. Financial crises did occur, but most of the countries affected were able to get back on their feet relatively quickly. The successful management of the IT bubble at the turn of the millennium supported the impression that if crises occurred, they could be dealt with relatively simply and efficiently. Japan, where the problems following the crisis at the beginning of the 1990s nevertheless had been long-lasting, was regarded as a special case. Although developments in Japan were regarded as interesting, the lessons perceived were not thought to indicate that anything similar could happen in, for instance, the United States or Europe. In this apparently stable macroeconomic environment, interest in research into the interaction between the financial sector and the real economy gradually declined.