As the financial markets have begun to normalise, the krona has strengthened, and there is reason to believe it will continue to strengthen if the normalisation continues. But at the same time, renewed unrest could lead to further periods with a weaker krona exchange rate. The assessment of the development of the exchange rate during the coming period is, as always, very uncertain. Concluding remarks The development of the exchange rate is very important to a small, open economy like Sweden’s. The effects of the exchange rate on the economy can be divided up into effects on inflation and effects on the real economy, which are mainly through international trade. BIS Review 3/2010  13  It is very difficult to forecast exchange rates accurately, but there are good reasons, at least in the slightly longer term, to expect the krona to appreciate. At the same time, experiences show that the krona rate is sensitive to the unrest in the financial markets. The conditions in the financial markets have normalised and the krona has strengthened this year. A continued normalisation of the financial markets points to a continued strengthening of the krona. If the unrest increases again the krona may once again weaken in the short term. However, this possibility is not included in the Riksbank’s main scenario. If the krona strengthens in the future, as indicated by our forecasts, one can expect this to subdue GDP growth somewhat and to keep down inflation.
4  The new profit margin will be (120–115)/115, which is just over 4 per cent of the purchase price. 5  Goldberg and Knetter (1997) summarise the results of the research. Adolfson (2004) also provides an excellent survey, together with new results. 6  See, for example, McCarthy (2000) and Bachetta and van Wincoop (2003). 7  However, there are some complications with dividing CPI into import prices and other prices. See Hansson and Johansson (2007). 8  See Burnstein, Eichenbaum and Rebelo (2002). BIS Review 3/2010  3  be various strategic reasons for not allowing import price increases to have a complete passthrough to consumers. Figure 1 illustrates some of the conclusions regarding the pass-through of the exchange rate. It shows the nominal exchange rate together with import and consumer prices in Sweden. We can see that import prices for consumer goods clearly co-vary with the nominal exchange rate, although there is no perfect correlation. It would thus appear that changes in the exchange rate nevertheless have a relatively large effect on these prices. Figure 1 Consumer prices, import prices of consumer goods and nominal trade-weighted exchange rate (TCW index) in Sweden Annual percentage change  Note. The import prices refer to consumer goods in the producer sector. Consumer prices are the CPI with a fixed interest rate (CPIF). Sources: Statistics Sweden and the Riksbank. We can also see that the relationship with the exchange rate is much weaker for consumer prices than for import prices.