It is therefore important to publish forecasts for inflation and the real economy, which the Riksbank does. We will never live in a world where it is possible to fully predict the future. Moreover, our knowledge of how the transmission mechanism works, that is, how an interest rate change works its way through the economy, is far from perfect. But given the available information and with the knowledge available we shall make the best possible forecasts and it shall be possible to evaluate our forecasts. When inflation deviates from the target it shall be possible to understand why this happened and to assess the deliberations that were held. To publish a forecast for the repo rate on top of all this, which is something few central banks do, makes it easier for us to find the most reasonable balance between attaining the inflation target and stabilising the real economy. It also helps us explain our policy. We also do this by presenting a number of alternative scenarios for the economy and showing what consequences these would have for monetary policy. Popular and unpopular interest rate decisions In the long run it is the actual "delivery” of low and stable inflation that creates confidence in long-term stable prices. But the economy can be subjected to unforeseen shocks that affect inflation and monetary policy cannot have the precision required to constantly maintain inflation at the target level. Deviations from the inflation target have happened before and will happen again. The important thing is that they are temporary.
He found that movements in interest rates around their long-run level could be explained by just the level of inflation relative to its target, and imbalances between the level of demand in the economy and the capacity of the economy to produce output. 4  8  http://www.kc.frb.org/publicat/Sympos/2005/PDF/King2005.pdf. BIS Review 21/2009  Asset prices and stock imbalances of the kind we have seen on the balance sheets of banks, households and companies are conspicuous by their absence in the Taylor Rule. Whether policymakers actually slavishly follow the Taylor Rule, or it simply represents a good description of how we behave is largely immaterial. Either way, the default position of policymakers has been that interest rates should not be used to choke off a boom in financial markets. That non-interventionist doctrine was based on two key judgements. First, that the costs of leaning against imbalances in financial markets were high. It was believed that policymakers would find it difficult to differentiate between movements in asset prices that could be justified by fundamentals and those which reflected bubbles. The central bank which frequently responded to movements in asset prices would often as not be doing so mistakenly. By the time that the central bank was confident that asset prices were unsustainable it would typically be too late to act. An increase in interest rates late in the day could prove counter-productive: the bubble might well have burst by the time the change in policy had filtered into aggregate demand.