Sweden had no inflation target; it had a fixed exchange rate that was defended through changes in interest rates. The exchange rate, rather than inflation in Sweden, acted as the anchor for monetary policy. The Swedish krona was pegged to currencies in countries with low inflation. However, it was not possible to generate confidence in this policy. The krona was devalued five times between 1976 and 1982, partly as a result of recurring cost crises. The large devaluation in 1982 was an offensive devaluation aimed at stimulating growth in the competitive sector. It assumed a tight fiscal policy to restrain domestic demand. During the 1980s both the credit and foreign exchange markets were deregulated, partly as a result of international developments. This was done gradually, but the credit market was formally deregulated in 1985 and the final parts of the foreign exchange regulations were abolished in 1989. Demand was high during the second half of the 1980s and the economy became overheated, resulting in high inflation, large wage increases and very large increases in property and share prices. Sweden’s competitiveness was undermined and finally the Riksbank could no longer withstand the speculation against the krona. In November 1992 the krona was allowed to float and it depreciated around 30 per cent in just a few months. The 1990s crisis was not merely a consequence of stabilisation policy failures. The situation was aggravated at the beginning of the 1990s by the tax reform – which stimulated increased saving – and an international slowdown in economic activity.
However, the Riksbank cannot affect the trend or the average for unemployment in the longer term. The fact that unemployment is higher now than it was prior to the 1990s crisis is essentially due to the factors I mentioned earlier, and not to monetary policy. However, the importance of monetary policy lies not merely in the possibility to influence through temporary changes in the repo rate. An essential part of monetary policy’s ability to stabilise lies in influencing inflation expectations so that they come close to the inflation target. A firmly anchored 2 per cent inflation target will affect price-setting and wage formation so that shocks - such as those we had during the "bridging over" policy years 1973-74 can be avoided. Once again: With regard to employment and unemployment, the most important measures must be taken outside of the Riksbank. What we can contribute is to conduct well-balanced monetary policy in line with the intentions of the Sveriges Riksbank Act, so that economic agents know what money will be worth in future. 5  6  These calculations can be made in different ways. Here the Riksbank has used an HP filter to calculate the trend. BIS Review 43/2006