Considering the price stability objective stipulated in the Sveriges Riksbank Act and the stance taken in the preparatory work, it can be concluded that monetary policy should be aimed at stabilising inflation around the inflation target and resource utilisation around a normal level. This is called flexible inflation-targeting in the terminology I proposed in a number of papers published in the 1990s (Svensson 1999). This is, incidentally, completely in line with the stance adopted by the parliamentary Committee on Finance in 2007, in its comments on the evaluation of monetary policy in the period 1995–2005 by Francesco Giavazzi and Frederic Mishkin (2006/07:FiU27): “The Committee maintains that Swedish monetary policy should be conducted in a flexible way and should aim to stabilise the development of inflation, employment and production.”  BIS Review 22/2010  1  This being so, some people may wonder: Wouldn’t it be better to have a level of resource utilisation that is higher than normal? Shouldn’t monetary policy be aimed at achieving a higher level of resource utilisation than normal? Well, you may think so – but 40 years of practical experience and 30 years of theoretical and empirical research have produced overwhelming evidence that monetary policy alone cannot bring about a higher than normal level of resource utilisation. Making attempts through a more expansionary monetary policy will not lead to success in increasing resource utilisation and employment.
But I will dwell on one particular point: what makes life difficult for these funds is not so much the fall in bond yields per se but one that isn’t accompanied by a fall in yields (rise in prices) on other, riskier securities they hold as assets. That’s precisely what has happened in recent years: on days that long-term real interest rates have fallen, equity prices have declined. More often than not, in other words, the yields on gilts and equities have gone in opposite directions and, over time, the gap between those yields has widened considerably. Since an independent easing of monetary policy tends at the margin to depress yields (raise prices) of all assets – and that’s precisely what you observe if you focus specifically on those episodes – it’s hard to believe that policy shocks are the main reason for the divergence between bonds and equities that underlies  2  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  2  the rise in pension deficits. More likely candidates are growing pessimism about future economic growth, across the world, and the perception that risks around that lower central path are skewed to the downside. This is part of the wider point that, in large part, central banks have been accommodating a long, drawn-out decline in the neutral real rate of interest. The decline in policy rates is a symptom not a cause of the forces shaping the global economy.