While the financial economy is in principle only a reflection of the real economy and vice versa, changes can take place as to which component is in the driving seat. A well-developed analysis of both sides would probably improve the basis for decision-making in monetary policy. Structural changes in the financial markets make it difficult to interpret developments and to find stable correlations between, for instance, the quantity of money and inflation, although this is true for many parts of the economy. It BIS Review 72/2000  2  applies, for instance, to methods for estimating such central variables as how many unused resources there are in the economy and how great the potential growth can be. Different methods then produce different results. The ECB is an example of a central bank that builds up its analysis from the real side and from the financial side - monetary policy rests on two pillars. There are partly historical reasons for monetary policy strategy being conducted in this way. Their strategy is perhaps not the best way to take financial trends into consideration. The risk with such a clear division is that the fact that it is actually about mirror images is disregarded and that the consistency between the real and financial analysis is lost. The advantage is that financial trends can clearly be taken into consideration when monetary policy decisions are made. In the second place, we can make different appraisals of the risk picture for the price trend during the forecast period.
Scope for major differences, despite a common strategy Even if there is agreement on the strategy for monetary policy, there is, of course, considerable scope for differences in assessments of where the interest rate should be in each situation. In the first place, the Executive Board can make different assessments of the most probable price tendency. As we know, economics is not an exact science and forecasts of prices and growth potential always rest on many assessments of an enormous mass of information and correlations. Models can never capture the complexity of the economy and how people’s economic decisions interact and must therefore always be regarded as one of many aids in assessments. The Riksbank uses a lot of different approaches and indicators to make assessments. The focus of the Riksbank’s analysis has been until now on the real economy and how it affects price trends. In many areas, we have come further than other central banks, while we have not come so far as regards the analysis of different financial aggregates and their linkage with inflation and real demand. An endeavour has certainly been made to take into account information provided by the development of the quantity of money and growth of credit. However, we have not for instance developed methods that can give guidance as to the level of indebtedness and the quantity of money that is compatible with the long-term sustainable growth of the economy on the basis of the inflation target.