A discussion of these kinds of central considerations is typically missing from the criticism put forward. In the international discussion, the central banks’ policy rates are currently seen as quite blunt tools when it comes to curbing the rise in household debt and housing prices. The reason for this is that the interest rate cannot be targeted at the problem area in question, but has a much broader impact on the economy, such as companies’ investments and, via exchange rate effects, their export opportunities. 11 It does not come as much of a surprise therefore that no central bank has so far used the interest rate weapon to any great extent for this purpose. There is currently a relatively high level of agreement that macroprudential policy and well-designed financial regulation should be the first line of defence in preventing financial imbalances from accumulating. 12 The tolerance band was not a target range As I mentioned, one proposal has been that the tolerance band for the inflation target should be reintroduced, as it is assumed this would make it easier for the Riksbank to raise the repo  11  The broad impact of the interest rate is occasionally highlighted as an advantage, however. Unlike macroprudential policy measures which can sometimes be circumvented, “the interest rate gets into all the cracks” (Stein, 2013). 12  See IMF (2015). BIS central bankers’ speeches  7  rate. It could be helpful to remind ourselves here why there was previously a band surrounding the inflation target.
As a starting point I think it is worth taking a step back and reminding ourselves why the Riksbank and many other central banks in general have developed inflation targets. 1 The advantages of an inflation target Money as we know it in modern times has no natural, intrinsic value. Historically, coins were minted using valuable metals and central banks promised to redeem banknotes in exchange for a certain quantity of such metals. However, since the early 1970s every trace of this kind of link to valuable metals has disappeared. The reason why banknotes and coins nevertheless have a stable value is based on expectations and confidence – expectations that the money will continue to be valuable in the future and confidence that the central bank will pursue a monetary policy consistent with price stability. There are several ways to build expectations of price stability. It has often been attempted to develop some form of nominal anchor for the economy. The anchor could, for example, be a fixed exchange rate, a target for the development of money supply or an inflation target. When it is credible, an inflation target acts as a benchmark and guides expectations in the economy. When economic agents have a common picture of how prices will develop in the future, it becomes easier to plan for the long term. The inflation target therefore lays the foundations for efficient price and wage formation.