However, with a rule of action, the application of regulations itself becomes a function of a number of variables that vary over time:  itlending  it   t ( z ( z , lt , yt ,...)) . Various institutional arrangements can be imagined, based on the distribution of responsibility for assessing the variables in the function, determining rules of action or functional form and, finally, for translating the function into actual regulations. The latter would probably require an element of discretionary decision-making. One possibility would be for the central bank to determine the policy rate ( it ) and for the supervisory authority to determine regulations, that is to say both z and z (...) , as is the case in Sweden. Another possibility would be for the central bank not only to determine the policy rate, but also to determine the time-varying regulations through taking responsibility for the application of the rule of action ( z (...) ), while the actual implementation of the non-time variable regulations ( z ) would be the responsibility of the supervisory authority. A variation of this would be for the central bank to be completely responsible for the implementation of the time-varying regulations. Finally, there is the possibility of the central bank taking responsibility for all regulation and supervision. At present, it is still too early to say whether the international debate will conclude that one form of organisation is better than any other.
This “credit expansion externality” implies a market failure and may justify public intervention. As experience has shown that it is precisely the bursting of property bubbles that has played such a decisive role in several financial crises, there exists reason to believe that such credit expansion externality may be particularly great on the property market. According to one view, a central bank should try to counteract the increase of property prices and credit volumes by keeping the policy rate higher than would otherwise be necessary during the upturn. Central banks should lean against the wind, as this is usually described. The idea is that the increase in property prices and credit volumes will thus be smaller, but also that the decline, in return, will be significantly less dramatic (Figure 8). If the development of property prices and credit volumes becomes more balanced, it is also assumed that the real economy and inflation will be more stable. While growth will undoubtedly be somewhat lower in the upturn, it will, on the other hand, make it possible to avoid the deep recession that may be the consequence of a fall in property prices. BIS Review 68/2010  13  Figure 8 Leaning against the wind Property prices and lending Without ” leaning” With ” leaning”  time  One complication arising in this context is that it is not entirely easy to incorporate the risks that may be associated with the rapid increase of property prices and credit volumes into the normal work of forecasting and analysis.