This trend began already in the mid-1990s, but it accelerated in the years preceding the crisis6 (see Figure 9). 4  Giavazzi, Francesco and Mishkin, Frederic: An evaluation of Swedish monetary policy between 1995 and 2005, Riksdag Committee on Finance, November 2006. 5  See for example Svante Öberg: Potential GDP, resource utilisation and monetary policy, Sveriges Riksbank, 7 October 2010. 6  Giavazzi and Mishkin (op. cit.) said that one reason why inflation had been low in the period 2002–2004 was that the Riksbank, since 2002, had begun to take house prices into account. However, in later papers Mishkin wrote that one lesson from the crisis is that that there are stronger reasons for monetary policy to counteract credit-driven asset price bubbles, see for example Mishkin, Frederic: Monetary Policy Strategy: Lessons from the Crisis, October 2010. BIS central bankers’ speeches  3  A comparison with a simple Taylor rule7 also indicates that the repo rate should have been significantly higher. A Taylor rule can indicate whether the level of the repo is reasonable. Based on inflation measured in terms of the CPIF or the HICP8 and the GDP gaps I presented earlier, the repo rate, according to the Taylor rule, should have been around 7 per cent in the third quarter of 2008. I now believe, as I said earlier, that the presented positive GDP gaps are exaggerated.
The conclusion that it could take quite significant interest rate rises to halt the accumulation of financial imbalances is also more in line with the Yellen camp’s view. It points to the limitations of the policy that the Borio camp argues should be given a greater influence, or possibly even be the main aim of monetary policy. Inflation targets are necessary However, as I have discussed, in this respect it is necessary to go a little deeper into the analysis. More specifically, the issue of whether it is really necessary to have a target for inflation at all needs to be addressed. Would it not be possible for monetary policy instead to focus on attempting to counteract the accumulation of financial imbalances and allow inflation to develop as it will? As I see it, this would not be an appropriate set-up. In my view, it is extremely important that there is an inflation target in which there is confidence, and that that target is set at a sufficient distance from zero. It is quite common that debaters who advocate a new type of monetary policy omit to discuss the problems that could arise if the central banks were to abandon their inflation targets. This is also the case in the Swedish debate. If the central banks were to abandon their inflation targets in the current situation, inflation would almost certainly fall and there would be a large risk that inflation and inflation expectations would become permanently stuck on a very low level.