If a deregulation stems from political decisions that could not be predicted, or its effects on inflation are calculated to disappear in less than one to two years, it will not elicit a reaction from the Riksbank as long as the rule of action is adhered to. The situation is different, however, if the economy goes through a series of deregulations or the price effects of a single deregulation continue for several years. This may lead to inflation being below the target more permanently, which in turn ought to lead, according to the rule of action, to a downward adjustment of the instrumental rate. The stimulus from monetary policy acts through the usual channels. So all else equal, one can expect a fall in market interest rates, rising share prices, a stronger expansion of credit and so on. General demand rises, employment moves up, unemployment falls and the inflation target is fulfilled. When the price effects have waned, there is a risk, if nothing else intervenes, of inflation rising above the target. To counter this, monetary policy responds by gradually increasing the instrumental rate again. Market interest rates move up, share prices fall and the growth of credit slackens. In other words, the customary transmission mechanism now works in the opposite direction, leading to some fall in production and employment as well as in resource utilisation. Another component of the process is the higher inflation’s limiting effect on household real income, just as the lower inflation benefited household income.
The review shows that the Riksbank’s rule of action works well as long as the structural changes concern price effects in connection with deregulations. In a period of accelerating productivity growth, on the other hand, the choices for monetary policy can be more complicated. While higher productivity growth is positive as such because it implies higher real incomes and a long-term improvement in living standards, during the adjustment process it can entail a number of risks. What looks like a good circle initially can lead later on to unduly strong and self-generating euphoria. It is, of course, difficult to tell under which circumstances the good circle will turn into a less favourable development. In practice it is presumably a matter of very difficult assessments. But the risk is probably greater if monetary policy aims too strongly and for too long at stimulating demand in order to  BIS Review 30/2001  5  keep inflation close to the target, instead of accepting a temporarily lower rate and doing its best to bring the development of demand into line with potential growth. In a way it could be said that such a reaction pattern implies that the central bank pays more attention to asset prices than in the normal case. It is important to note, however, that this is done in a situation where unduly rising asset prices are one of several signs that imbalances are building up in the 3 economy .