BIS central bankers’ speeches  17  The revenue and costs of different measures should be weighed against each other I mentioned previously that the exact implementation of different measures must largely be based on value judgements. The purpose of the measures, that is to say the outcome, is to reduce the risk of unfavourable developments further ahead. However, costs also occur in the short term when opportunities to borrow are limited, as this subdues consumption and thereby also GDP growth. When deciding whether to introduce a measure, it is thus necessary to weigh the gains, in the form of reduced risks in the longer run, against the costs, in the form of lower demand and GDP in the short run. 22 In this context another aspect of tax relief on mortgage interest can be mentioned, namely that it currently represents a cost for the state. According to an analysis carried out in June this year by the National Institute of Economic Research, the costs to the state of tax relief will increase considerably when interest rates rise: from around SEK 23 billion to 60 billion (1 per cent of GDP) in 10 years. Reduced tax relief could therefore improve the state’s finances quite substantially in the future, which would create space for reform to compensate for many of the short-term macroeconomic costs which would otherwise occur.
In the long run monetary policy is only capable of influencing inflation; a systematically higher rate of inflation, however, would not lead to higher long-term growth. The level of long-term growth is determined instead by real economic factors such as demographic changes, technology, education and the efficiency of markets. In so far as a long-term relationship between inflation and growth does exist, most of the evidence suggests that, if anything, higher inflation impairs the workings of the economy and thereby weakens output. Today there is widespread - though not yet complete - agreement on this. What monetary policy can do, on the other hand, is influence the economy’s fluctuations around the long-term trend, albeit without any lasting effects on growth. This means that if resource utilisation is low or high, monetary policy can be used to stimulate or dampen activity temporarily, but not to fine-tune the economy. With an inflation target which applies downwards as well as upwards, so that deflation as well as inflation are avoided, monetary policy can then exercise a stabilising influence and help to smooth economic fluctuations around the long-term trend. Problems arise if resource utilisation becomes so high that inflation starts to accelerate and the central bank has not intervened. People may then begin to count on inflation remaining high in the longer run. A higher level of inflation may then be established, whereas the effects on production and employment will be only temporary.