1. Where do central banks go from here?
Lars E.O. Svensson Sveriges Riksbank Panel discussion, Norges Bank Symposium on
What is a Useful Central Bank?
November 18, 2010 1 1

2. Background
The financial crisis was caused by other factors than monetary policy
MP and financial-stability policy (FSP) are distinct and different – it was FSP that failed, not MP
FSP and MP: Distinguish according to (1) objectives, (2) instruments, and (3) authority in charge
Financial stability (FS) as an objective of MP makes little sense – but makes sense as an objective of the central bank, if the central bank has the suitable instruments

3. Monetary policy after the crisis
Flexible inflation targeting (FIT) is fine – before, during, and after the crisis
But greater role for financial conditions in transmission mechanism
FS may imply restrictions on MP – rare event
Normally, handle FS w/ FSP, not w/ MP (principle of comparative advantage)
Do not use MP to target housing prices
FIT with mean squared gaps (MSGs) – another step towards increased transparency

4. Monetary policy with mean squared gaps Norges Bank, March 2005
0,0
2,0
4,0
6,0
8,0 02 03 04 05 06 07 08
Main
Low
High
0,5
1,0
1,5
CPI-ATE
Output
3,0
-2,0
Alternative policy-rate paths
Percent, quarterly averages
Mean squared gaps
Annual percentage change
Output gap
Percent