Urban Bäckström: Monetary policy in a small open technology-oriented economy outside the major currency blocs Speech by Mr Urban Bäckström, Governor of the Sveriges Riksbank and Chairman of the Board of Directors and President of the Bank for International Settlements, at the Conference on New Challenges for Credit Markets and Monetary Policy, hosted by Handelsbanken and held in Stockholm, 18 May 2001. *  *  *  Thank you for inviting me to this conference and to discuss the Swedish economy and monetary policy with such a distinguished group of people. Today I intend to begin by looking back at economic developments in recent years in Sweden. That should help to put the current discussion about the Swedish economy in perspective. After that I shall be saying something about the economy's recent cyclical path and how I assess the future in the light of the information that is presently available. Economic policy realignment in the early 1990s The direction of Sweden's economic performance during the 1990s contrasts sharply with the unstable, inflationary path we experienced in the 1970s and '80s. That stop-go policy contributed to the recession in the early '90s, which was the worst for over sixty years. The 1970s and '80s illustrate how a long period of high and variable inflation creates an atmosphere of uncertainty and instability. Slowly but surely, long-term conditions for production deteriorate. It was partly in the light of these experiences that Swedish economic policy was realigned in the early 1990s.
The apparently unending increase in expectations of rising share prices on U.S. stock markets stimulated the capital imports, which continued to such an extent that the dollar rose to high levels against other currencies. Together with large investments in the real capital stock, which led to a capital-deepening process and hence an acceleration of productivity, the dollar's appreciation held back the price impulses that normally accompany growing pressure from wage costs. BIS Review 42/2001  3  It is not yet possible to tell to what extent the U.S. economy will experience a lengthy, more difficult process of adjustment. That is probably the background to how the Federal Reserve has acted in recent years. A series of interest rate hikes during 1999 and 2000 was presumably intended to restrain the euphoria and excessive expansion. When a downturn then became evident, it seemed desirable to try to limit the mood swing by means of the marked interest rate cuts we have seen this year. It is precisely the Federal Reserve's vigorous action that underlies certain analysts' view that the current economic slowdown will be fairly mild and brief. …and the tensions between supply and demand in Sweden Since the previous inflation report, demand in the Swedish economy has slowed down somewhat. This is true in particular for industry. Incoming statistics also indicate a slightly weaker growth in household sector consumption. Employment, on the other hand, remains strong even though more forward indicators of the labour market are signalling slower growth later this year.