Well-judged adjustments in the interest rate can ensure a stable development of inflation in the long term. In addition, monetary policy can, at best, contribute to alleviating cyclical fluctuations in production and unemployment. However, the interest rate is much too blunt an instrument to be able to fine-tune the economy to any great extent. Secondly, a production target or employment target would only be purposeful if we were fairly sure how large the growth potential of the economy was and what level of employment represented some form of equilibrium. In practice, it is not possible to determine this with any great precision. Both potential growth and employment vary over time with structural changes in the economy in ways that are difficult to quantify. BIS Review 17/2007  3  Thirdly, an extra difficulty in this context is that the picture of how the economy develops changes over time as statistics are revised. This applies in particular to GDP statistics. It becomes particularly clear how difficult it would be for the Riksbank to have a target for productivity growth if one looks at how the statistics were revised at the end of 2004 and beginning of 2005. The information available at the beginning of 2005 indicated a fairly clear slowdown in production growth. Later on in 2005 the picture of a slowdown in the growth of the economy was confirmed, but it then appeared to have a more prolonged course of events.
Since then the picture has been revised again, and now the economic downturn around the end of 2004/beginning of 2005 appears much milder than was indicated by the statistics at that time. Today we have a new description of history to base our own assessments on. This type of statistical measuring problem was one of the things that made Francesco Giavazzi and Frederic Mishkin advice against having targets for production or employment in their evaluation of Swedish monetary policy. I agree with them. The best we can do is to balance monetary policy so that the economy follows what is roughly considered to be a long-term favourable path. This balance should of course be within the scope of our inflation target. The current situation and monetary policy considerations This seems like a good point to move on to talk about the Riksbank’s current views on inflation prospects. The economy has grown rapidly in recent years. Over the coming years we are expecting growth in the economy to slow down and approach a growth rate that is more sustainable in the long term. One reason is that our assessment is that international economic activity will slow down; another is that the productivity increases will slow down. Over the coming year, GDP growth nevertheless looks to be relatively high. Employment will rise and households will increase their consumption at a rapid rate. We are assuming that employment will continue to rise during the forecast period, albeit at a slower rate. This will lead to unemployment falling.