Lars Heikensten: Monetary policy and wage formation in Sweden  Speech by Mr Lars Heikensten, First Deputy Governor of the Sveriges Riksbank, at the Office of Labour Market Policy Evaluation (IFAU), in Stockholm, on 5 May 2000. *  *  *  Let me start by thanking you for inviting me to this seminar. Few things are more important for the Swedish economy today than to ensure that we have a well-functioning wage formation system and labour market. In my introductory speech today I will discuss four issues. First, I will present the argument for adopting price stability as the Riksbank’s chief objective and say some words about the Swedish debate on this matter. Then I will comment on developments during the last decade, when we abandoned the high-inflation policy of the 1970s and 1980s. My third subject will be the current monetary policy situation and the choices that we now have to make. Lastly, I will comment briefly on wage formation and the labour market in the light of this situation. Discussion of the price stability objective In the early 1990s, there was a shift in Sweden’s economic policy towards establishment of a low-inflation regime. A few years later, price stability was established as the objective of monetary policy. This change was the result of a realization among policymakers that the policy of high inflation and recurring devaluations that had been pursued in recent decades had failed.
BIS Review 39/2000  2  Let us make a comparison between the period starting with the recession of the early 1970s up to 1989, when annual inflation averaged over 9.5%, and the period from 1993, ie the end of the last recession, up to now, with an average inflation rate of just over 1.5%. Broadly speaking, the latter period presents a brighter picture. The total rate of investment, measured in terms of year-on-year changes, is higher on average during this period, especially if investments in housing are excluded. The average productivity of the economy as a whole is broadly the same during the two periods. However, behind the average during the first period lay some years of very strong growth in productivity in the early 1970s, offset by poor productivity growth during the 1980s. The Swedish economy has grown by 2.3% on average since the start of 1993. This is only slightly higher than growth during the period 1971-1989. However, the composition of growth is different in the two periods. During the second period, growth in industry has been just under 3.5%, which is about 1% higher than during the previous period. The difference in growth would also be more marked if the latter period were to start only six months later. Average growth from mid-1993, when the recession levelled out, to the end of 1999 was 2.9%. Diagram 2. Gross investment, total and excluding housing  Gross capital formation 7 6  7 Total Excl.