It might perhaps have been possible to avoid the house price bubble if tighter monetary policy had been conducted at the beginning of the 2000s, but the price in terms of deflation and low growth could have been unreasonably high. Given the situation at the time the decision was made, the chosen policy appears well-motivated. Should central banks try to prevent financial bubbles from arising? Despite the fact that central banks perhaps cannot be blamed for the crisis arising, I think there is reason – given what has happened recently and the research carried out in recent years – to further consider what role they can and should play with regard to these issues. One often tries to distinguish between pure monetary policy, which is conducted with the policy rate as the primary instrument, and measures that are first and foremost aimed at promoting financial stability. However, this crisis has shown that it can sometimes be difficult to make this distinction. Without the measures to reduce the turbulence on the financial markets, the low interest rate policy conducted to counteract the recession would hardly have had any great impact. At the same time, it may be important to make this distinction as monetary policy is something for which the central bank has sole responsibility, while promoting financial stability is a task shared with other public authorities. There is currently important work being done on designing better methods for promoting financial stability, both nationally and internationally.
A study by the ECB 9 presented a model that can identify just over 80 per cent of the cases in OECD countries where excesses have later led to costly downward adjustments in the economy. In the IMF’s most recent “World Economic Outlook” 10 the conclusion is more cautious. It is claimed in this study that it is possible at best to identify around half of the excesses (including the most recent crisis) that have later led to significant corrections in developed economies. Both of the studies conclude that (global) credit growth is the best individual indicator of overheating. A study by the Bank for International Settlements (BIS) in 2004 11 also concluded that although it is difficult to find relevant bubble indicators, it is not impossible. The study claims that there are signs of asymmetry as some central banks have a tendency to stimulate the economy when the stock market falls, but not to tighten their policy when stock market bubbles are building up. The conclusions of these studies are that central banks should try in various ways to take into account, for instance, an overly rapid growth in credit that risks leading to a severe downward adjustment in the economy later on. However, it is emphasised in many studies that further research in this field is required to be able to draw more definite conclusions for future monetary policy. The development of this type of indicator is now high on the agenda both nationally and in the international economic policy cooperation.