Svein Gjedrem: Financial stability, asset prices and monetary policy Address by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the Centre for Monetary Economics/Norwegian School of Management, 3 June 2003. The address is based on previous speeches and newspaper articles. An assessment of some new aspects of economic developments is also presented. Please note that the text below may differ slightly from the actual presentation. The Charts in pdf can be found on the Norges Bank’s website. *  *  *  Introduction Developments in equity and bond prices, house prices, credit and debt may have an impact on inflation and are important information for central banks when they set interest rates. Asset prices may also be indicators of future developments in output and demand. Sharp changes in asset prices have often occurred when there are considerable imbalances in the economy. There have been episodes where bubbles have accumulated in the form of sharp increases in asset prices in the equity and housing markets while inflation has been low. Higher asset prices and increased optimism often contribute to high debt growth. Increased access to credit pushes up asset prices further. There is therefore an interaction between developments in debt and asset prices. When the bubbles burst, the result may be an economic downturn and deflation. In this way, developments in asset prices may give rise to an unstable inflation environment. Developments of this kind may also threaten the stability of the financial system, cf.
John Gieve: Financial system risks in the UK – issues and challenges Speech by Sir John Gieve, Deputy Governor of the Bank of England, at a Centre for the Study of Financial Innovation Roundtable, London, 25 July 2006. *  *  *  The Bank and financial stability The Bank of England’s central position in the economy owes a great deal to the development of its role in managing financial crises. The need for a central bank to provide liquidity to the market was identified as early as 1802, when Henry Thornton said: “…if the Bank of England, in future seasons of alarm, should be disposed to extend its discounts in a greater degree than heretofore, then the threatened calamity may be averted through the generosity of that institution.” 1 It took until the 1870s for that role to be institutionalised. The arrangement to request a letter from the Chancellor permitting the Bank to issue notes not backed by gold at a time of crisis was important to the remarkable financial stability that ensued. Indeed, some academics suggest that a true financial panic has not taken place in the UK since Overend Gurney & Company collapsed in 1866. 2 Of course a lot has changed since then but maintaining financial stability remains one of the Bank’s two core purposes. The current institutional arrangements are spelt out in a Memorandum of Understanding (MoU) between the Bank, the Treasury, and the FSA.