If wage formation places a lot of focus on the current level of CPI inflation, I see a risk that this could create instability in the wage formation system. A situation similar to the one in the 1970s and 80s could then ultimately occur, whereby wage developments varied substantially from year to year depending on the current inflation rate, which also varied extensively. It would therefore be better if wage formation were based on a less volatile inflation measure than CPI inflation.13 A new monetary policy target variable could hopefully take on that role. A band surrounding the target When the General Council of the Riksbank decided to introduce an inflation target of 2 per cent in January 1993, it also decided that there should be a tolerance band surrounding this target of 1 percentage point both above and below.14 The aim was to clarify that the Riksbank does not have the ability to control inflation exactly in the short term, but that it also aims to limit deviations from the target – that it does not intend to “tolerate” deviations greater than 1 percentage point. The size of the interval was determined by what intuitively appeared to be reasonable. It was not possible to rely on any past experience as the monetary policy regime was entirely new and inflation had varied considerably during the old regime which had a fixed exchange rate. The Riksbank expected that inflation would now vary less, but was unsure as to how much.
Moreover, bilateral agreements may promote an asymmetrical system of international relations in which the most influential countries ultimately impose their priorities and demands on the rest. In the financial arena, the difficulties of reforming IMF governance and the perception that its resources might be insufficient in the event of a severe crisis have led regional financial agreements to proliferate. There has been a shift from a multilateral system to one more decentralised and fragmented. In this new system of global financial governance, we must acknowledge that regionalism and multilateralism can be compatible, as some problems are regional and are better resolved at that level. Indeed, regionalism and multilateralism are not mutually exclusive; rather, they can support and complement one another, generating synergies that strengthen the global financial safety net. In this connection, coordination among the different elements should be reinforced, departing from the basis that a regional system can complement, but not replace, that of the IMF. In this respect, I believe the IMF continues to play an essential role for several reasons. First, because of its unique experience and knowledge of crisis-management. Second, because the IMF’s participation in the design of adjustment programmes provides an objective perspective that regional institutions may occasionally not offer and which, moreover, is respected both by national authorities and by the private sector. Third, because in the case of interconnected economies, the IMF’s participation can dissipate the potential regional concentration of risks.