In their current state, they therefore cannot address issues of financial stability or the link between low interest rates and financial excesses. II. The recent financial crisis: are central banks the culprits? The recent financial crisis has thrown the positive pre-crisis perceptions of modern monetary policy into question. Indeed, many analysts now attribute a certain degree of responsibility for the financial crisis to central banks, in sharp contrast with the typically benevolent assessment of their contributions to the “Great Moderation”. Two main lines of argument support claims that central banks were contributed to the crisis, as Slide 2 illustrates. The first is that the precepts of the “inflation-targeting” paradigm were misapplied and that these policy errors have contributed to, or have directly caused, the crisis. The second is that the paradigm itself is deficient, or at least incomplete. Indeed, even when central banks conduct monetary policy optimally, according to the “inflation-targeting” mantra, it is a mistake for them not to recognise that a long period of low interest rates may encourage financial intermediaries to take increased risks with negative consequences for systemic stability. One clear proponent of the first argument is John B. Taylor. Taylor has argued that the Federal Reserve contributed to the crisis by setting interest rates too low prior to 2007.
But uncertainty had increased as a result of the financial unrest and we expected this to lead to some negative consequences for growth both internationally and in Sweden. This was why I concluded that it was still reasonable to count on roughly the same interest rate path as in June. But such considerations and deliberations are the final stage in a long process. For me and my colleagues on the Executive Board, the next opportunity for this will be at the monetary policy meeting at the end of this month. 6  BIS Review 112/2007