This may seem paradoxical but if people feel they can rely on the central bank, in an economic slowdown it may be possible to ease the monetary stance without triggering higher inflation expectations and bond rates, because everyone counts on policy being tightened before inflation moves up. We have experienced something of this sort in Sweden in the past year. In a system with poor credibility, a monetary easing may be perceived as a sign of a lasting upward shift in inflation. This in turn may generate self-fulfilling expectations, with future problems when efforts are made to control inflation once more. It is understandable that the risk of this is seen as particularly great in economies where inflation has been high for a long time. A more independent central bank is thus in a better position not only to maintain low inflation but also to operate at times with a policy that includes an element of stabilisation (though the problems of fine tuning stabilisation policy should not be underestimated). The German central bank is one example; over a series of decades, economic slowdowns could be parried by lowering the short interest rate fairly rapidly and markedly. It may be in place to point out that credibility and, for that matter, independence can be achieved in various ways. Some countries have recently clarified their regulations so as to BIS Review 32/1997  -7-  bring them into line with the arrangement I have just advocated. One example is New Zealand.
In other countries, for instance the United States, policy has been conducted so that it has gradually earned increasing confidence within the time-honoured system. In my opinion the rule system is important; it reflects the general commitment to monetary policy and can provide a short cut to credibility. In a democratic society, however, monetary policy is ultimately founded on popular support. That is one reason why it is important for the Riksbank to operate in such a way that confidence is created in the policy of price stability. Among other things, this calls for a clear intellectual framework that can be evaluated and for an open discussion about the direction of monetary policy. Delegates accountable to a democratic body An argument that is heard from time to time in the monetary policy debate is that the delegation of monetary policy’s construction to an independent central bank would be undemocratic. In my view that is incorrect. The Riksbank is an agency of the Riksdag (Sweden’s parliament), which clearly can stipulate the objective which the Riksbank is to aim for. It is worth emphasising, however, that it would naturally be inappropriate for the Riksdag to set up objectives that the Riksbank is not in a position to fulfil, like that - as we saw earlier - of “creating jobs” on a permanent basis. When, but only when, the Riksbank’s objective has been established, will it be possible to monitor operations effectively.