My idea, which I have already mentioned, is basically this: Each economic policy framework is designed to function well in a given economic reality. When the reality changes, the framework may also need to be adapted, reformed or supplemented. However, it is also important to be able to identify the changes and understand their implications. The frameworks should aim to be robust for events that cannot be predicted. They should also be symmetrical – be able to handle shocks that lead to both higher and lower outcomes than expected. For example, the current system was created to deal with a high government debt, high inflation and high nominal wage increases. An updated framework should have scope for dealing with risks on both the upside and the downside. The frameworks that we have built up are worth defending, but we must not be too complacent and believe that there is no potential for improvement. We know that the world is different today than it was thirty years ago and that we have built up vulnerabilities in the Swedish economy. Difficult task but better conditions The Riksbank, like many other central banks, faces a challenge that we have not met for decades; inflation has risen to levels that we have not seen since the early 1990s. As I have mentioned, this was initially about a number of global supply shocks that pushed up commodity prices, in particular. But, it has gradually become increasingly clear that the price increases have begun to spread widely in the economy.
When equity prices increase rapidly, the equity allocation will exceed the strategic weight of 60 per cent. Rebalancing rules are then applied to bring the equity allocation back to 60 per cent. These rules are more important than many perhaps believe. Many investors waited for a long time, probably too long, to rebalance their portfolios during and after the crisis, when equity allocations fell sharply. It should also be considered whether the rules should be designed to provide for a greater degree of automaticity, less judgement and probably also greater transparency. It is important to take into account the Fund’s particular features, that is to say a long-term, large investor without short-term liquidity needs, when evaluating which investment strategy is most appropriate. In the spring 2010 Report to the Storting on the Fund, the Ministry of Finance suggested that the level of less liquid assets should be increased: “Further development (of the strategy) will seek to diversify the risk further and increase the weight of investments that benefit from the Fund’s size, long-term perspective and ability to hold less liquid assets.” Today the Fund’s assets are divided into two classes: equities and bonds. Going forward, a division into three asset classes may better enable the Fund to achieve its long-term objectives. The first asset class is equities. This class features the highest risk exposure and the highest expected return. It accounts for 60 per cent of the Fund, which reflects the risk willingness of the Fund’s owner.