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.
This meant that interest rates in several countries that had previously had a higher interest rate than Germany were reduced to a common euro level. In these countries, this contributed to a dramatic expansion of credit, rapid growth and a high level of inflation. In addition, regulation and supervision of the financial markets were national processes, despite that fact that the operations concerned were crossborder. However, it did not become apparent that this situation was untenable until the spring of 2010 in connection with the crisis in public finances in Europe. Each country certainly believed that they had good reasons for conducting their particular choice of monetary policy. But for the world as a whole, which in itself is a closed economy in which overall monetary policy affects growth and inflation, monetary policy became too expansionary. This resulted in strong GDP growth and rapidly increasing prices for crude oil and other commodities, as well as a rapid credit expansion and rising asset prices, above all for housing in certain regions. This ultimately led to the financial crisis when the housingprice bubble burst. Now, you may say that it is rather pointless to criticise something with hindsight. It is easy to say now what should have been done then. However, my point is not to criticise what was done but to learn from history. Even today, we can see the same pattern: that is an expansionary monetary policy for the world as a whole, strong growth and rising energy and commodity prices.