12 See ‘[De]Globalisation and Inflation’, speech by Mark Carney given at the 2017 IMF Michel Camdessus Central Banking Lecture, 18 September 2017. 10  All speeches are available online at www.bankofengland.co.uk/news/speeches  10  private sectors sought to reduce their pace of borrowing. These shorter-term factors pushed the equilibrium interest rate in the UK (and other advanced economies) into negative territory, prompting the adoption of unconventional policies following the crisis. The fading of the headwinds from the crisis implied that some of the fall in the equilibrium rate would gradually unwind, though the structural forces were thought likely to persist for many years to come. As a result, the MPC judged that the pace of Bank Rate increases consistent with eliminating slack and keeping inflation close to the target would be gradual and that, even once spare capacity had been absorbed, the appropriate level of Bank Rate was expected to be materially below the pre-crisis average of 5%. Out of that assessment came the guidance that future rises in Bank Rate were expected to be “limited and gradual” – a phrase so often repeated it became part of the monetary policy furniture. As intended, the MPC’s “limited and gradual” guidance dampened interest rate volatility and reduced the correlation between interest rate volatility and economic uncertainty. Both developments increased the degree of monetary policy stimulus at a given policy rate, thereby reinforcing the recovery during turbulent times. GDP grew robustly over this period, supported by strong consumer and business spending against a backdrop of continued fiscal consolidation.
I am thinking instead of, for example, Mexico, Indonesia, Thailand, South Korea, Malaysia and Brazil. In these cases, inflated asset prices and both domestic and external debt had an important bearing on the subsequent course of events. One important lesson is that a floating exchange rate with an explicit inflation target makes it easier to avoid a situation with rapidly rising asset prices, an unduly strong expansion of credit and high short-term borrowing abroad. That does not mean that a fixed, but adjustable, exchange rate is bound to result in problems of this type. Experience from Denmark is a good example. A clear problem in Sweden’s case, however, was that in the 1980s monetary policy could not be used to counter the tendencies to strong credit growth and rapid asset price increases. Another problem, as I just mentioned, was that the fixed exchange rate policy lulled people into a false sense of security and provided an incentive for short-run borrowing in foreign currency. With a floating exchange rate, the krona’s fluctuations make the exchange risk more evident (Diagram 2). Such a regime may have other drawbacks but it does show potential borrowers that foreign-currency loans involve a risk. The stock of foreign-currency loans to households and firms is in fact smaller today than it was a decade ago. A point to bear in mind is that the problem in the late-1980s was not the strong asset price rise as such but the combination of this and heavy borrowing in Sweden and abroad.