Assuming, however, that we nevertheless conclude that monetary policy has not been clearly inefficient in the sense that I described earlier, the next step is to focus on what combination of the stabilisation of inflation and the real economy the central bank actually selected or, in other words, which of all the possible points on the Taylor curve the central bank selected. There are many different efficient monetary policy alternatives to choose between every time a monetary policy decision is made. But did the central bank make a good choice? In the event of a conflict between stabilising inflation and stabilising the real economy, did the combination chosen by the central bank represent a reasonable balance between the two? Did the central bank attach reasonable importance to the stabilisation of the real economy in relation to the stabilisation of inflation? In the literature, as in the case of the forecast loss function I presented earlier, the constant that is the relative weight that the central bank gives to the stabilisation of the real economy in relation to the stabilisation of inflation is usually denoted by the Greek letter lambda, λ. In Figure 3, we can show the forecast loss function with the help of iso-loss curves for combinations of sums of squared inflation-gap and output-gap forecasts that generate equally large losses. Such iso-loss curves are in this case downward-sloping, straight lines with a slope of 1/λ, the reciprocal of lambda. Iso-loss lines closer to origin correspond to lower losses.
An effective implementation of monetary policy presupposes that there is a high level of private-sector confidence in the central bank with regard to both the inflation target and the monetary policy analysis. It also requires that the central bank is successful in communicating its analysis and intentions. In other words, a precondition for an effective monetary policy implementation is that the central bank is open and transparent. Most central banks use a short-term interest rate as the policy rate to implement monetary policy. However, the actual policy rate in the two months prior to the next monetary policy  BIS Review 29/2009  11  decision plays a very minor role in the economy. Expectations regarding future policy rates, on the other hand, do play an important role. They affect interest rates with longer maturities which in turn are the interest rates that have an impact on the economic decisions of households and companies. The Riksbank and a few other central banks have taken this seriously and publish their own policy rate paths to facilitate the formation of expectations regarding future policy rates and to influence these expectations more effectively. If the central bank is successful in its communication, the market participants should be able to predict rather well how new information or new shocks will affect the central bank's forecast for the policy rate. If the central bank's analysis is credible, the market's expectations regarding the future policy rate should also change in line with the revised interest rate path of the central bank.