As shown in a survey made by Finansinspektionen earlier this year, there are many indications that the households taking on loans are those that can afford to borrow. The Riksbank has also drawn this conclusion so far in its Financial Stability Reports. I therefore find it difficult to believe that the developments in the housing and credit markets at present would constitute any danger to the banks and thus to financial stability. BIS Review 70/2010  9  Concluding remarks In connection with dramatic events like the recent financial crisis, proposals for radical changes tend to crop up in the general debate. But I do not see a radically-different monetary policy ahead of me. I am still convinced that flexible inflation targeting is the best monetary policy solution for Sweden. The repo rate is not the most effective weapon for trying to prevent or alleviate an imbalance in, for instance, the property market, but this does not mean it is completely ineffective. We must become better at analysing financial conditions and not least at capturing variables such as house prices and credit growth in our forecasts. And this is something we are working hard to achieve, both at the Riksbank and in many other areas. We must become better at clearly explaining how we assess the risks of a bubble given a particular repo rate policy, and what consequences a bubble may have if it bursts.
If we knew a very good way of calculating the probability of a bubble growing and bursting at some point in the future and of calculating how great an effect it would have, then we would of course have already put this calculation into our models. But unfortunately we have not got there yet, although intensive work is being carried out, not least by the Riksbank, to better capture financial variables in our analyses and forecasts. However, there is a long and difficult road ahead before we achieve what we want. Practical problems and important considerations Let us assume, for instance, that we were to find ourselves in a situation where there is a major risk that a loan-driven bubble in the property market will collapse further ahead and that it will then contribute to a heavy fall in GDP. How should we react to this? If we knew with certainty that this would happen, then it is likely that most of the models we have now would indicate that we ought to cut the policy rate to alleviate the effects on inflation, production and employment. But if we were to cut the rate in such a situation we would also risk blowing up the bubble even more before it burst. This would in turn contribute to the ensuing fall being from an even more over-valued level and the consequences would be even more serious than if we had not cut the repo rate.