The differences compared with developments during the inflationist and unstable 1970s, often entitled “The Great Inflation”, have been so notable that this development has been awarded its own title in academic research – “The Great Moderation” 6 . Although the reasons for the greater real economic stability are not entirely clear; there are hypotheses that economies have undergone various types of structural changes which have subdued the fluctuations – such as improved stock management among companies and financial innovations – or that the shocks to the economies have quite simply been smaller than during the 1970s. However, it is most likely that a better monetary policy has played some role in the increased real economic stability. We have thus established what a central bank’s primary tasks should be: to maintain price stability, to promote stability in the financial system and – as long as the nominal anchor formed by the price stability target is not threatened – to try to stabilise the real economy. There may nevertheless be reason to provide an example of what is not an appropriate objective for a central bank. As I have tried to emphasise, the real economic objectives that central banks have entail stabilising real quantities such as production and employment. By stabilising I mean that one tries to reduce the fluctuations around the long-term trend. However, it is important to realise that this long-term trend development is not something that monetary policy can directly influence.
During this period one could say that the central banks’ original task of guaranteeing the value of the means of payment was neglected as other tasks, primarily affecting demand in the economy, were perceived as more important and more interesting for monetary policy. The consequence was that the nominal anchor was relinquished and to establish it again proved to require considerable effort. Let me before I discuss the other important component of an efficient payment system – financial stability – say something about the most common approaches to attaining price stability. There are currently two predominant means of trying to ensure that inflation remains at a low and stable level. One is to tie one’s own currency to the currency of a country with a long tradition of low and stable inflation. The fixed exchange rate thus becomes an intermediate target through which one hopes to attain the ultimate target – price stability. The other means is to allow the exchange rate to float and to give the central bank the task of acting more directly to attain low, stable inflation – what is known as inflation targeting. The changeover in monetary policy made by Sweden at the beginning of the 1990s meant that we switched from the first method, fixing the exchange rate, to the second, targeting inflation. The reason was quite simply that the fixed exchange rate had not functioned very well as a means of keeping down inflation and establishing a nominal anchor in the economy.