Lars E O Svensson: Monetary policy after the crisis Speech by Mr Lars E O Svensson, Deputy Governor of the Sveriges Riksbank, at the conference “Asia’s role in the post-crisis global economy”, held at Federal Reserve Bank of San Francisco, 29 November 2011. *  *  *  I thank Claes Berg, Hans Dellmo, Hans Dillén, Anil Kashyap, and Bengt Pettersson for helpful discussions and comments. Carl Andreas Claussen of the Riksbank staff contributed to the paper. The views expressed here are my own and are not necessarily shared by the other members of the Riksbank’s Executive Board or the Riksbank’s staff. In the aftermath of the financial crisis of 2008 and 2009 there has been a lively debate about what caused the crisis and how the risks of future crises can be reduced. Some blame loose monetary policy for laying the foundations for the crisis. There is also a lively debate about the future of monetary policy, whether it needs to be modified in the light of the crisis, and what its relation to financial stability should be. Here I will discuss the lessons for monetary policy from the financial crisis, the relation between monetary policy and financial stability, the role of monetary-policy instruments other than the policy rate, and some issues for emerging-markets arising from capital flows and exchange-rate movements.
The effects that are attributed to monetary policy should only be the effects the deviation between the short real rate and the neutral rate, not the effects of the whole level of the short real rate, the sum of the deviation and the level of the neutral real rate. The neutral real rate is affected by many things and can be low  4  Woodford (2011) sets up a model where the probability of a financial crisis is assumed to be an increasing function of a state-variable that may be identified with leverage. Furthermore, leverage is assumed to be increasing in lagged leverage and the current output gap and is also subject to shocks. From these assumptions obviously follow a case for tighter monetary policy, “leaning against the wind,” in order to, everything else equal, reduce the output gap and thereby leverage and the probability of a financial crisis. However, the introduction in Woodford’s model of financial-stability instruments such as capital requirements, possibly cyclical ones, would allow leverage to be controlled more directly than indirectly and bluntly by the policy rate via the output gap. Monetary policy would be free to focus on stabilising inflation and the output gap and need not lean against the wind.