As a result of the devaluation policy, it became increasingly difficult to keep inflation in check. Wage earners tried to compensate themselves for the reductions in real wages, and firms had little reason to resist; everyone believed that the krona would be devalued if price and wage inflation became too high and competitiveness was threatened. The expansion of the public sector contributed in turn to a rise in the tax burden that was unsustainable in  2  BIS Review 59/2004  the long run. One way of putting it is that the devaluations and the increase in public sector employment allowed us to put off dealing with our employment problems. Monetary policy and employment in the long term The crucial insight when discussing unemployment and jobs - an insight which has firmly rooted support in decades of economic research and practical experience - is that loose monetary policy cannot be used to bring about a lasting rise in employment. The best that monetary policy can do is to reduce the fluctuations in the cyclically determined component of unemployment. Consequently, it’s not possible to create lasting jobs by systematically keeping interest rates low, weakening the exchange rate and allowing inflation to rise. In other words there is no opposition between a target for inflation at the levels pursued by most central banks today and a policy of high employment. In order to reduce unemployment permanently, attempts must be made to influence the structural component of unemployment, i.e.
Four factors seem to have been especially significant: •  At the beginning of the period with an inflation target, particularly in 1996, the CPI was affected considerably by the dramatic decline in interest rates that ensued when the credibility of the new regime was established. •  On a couple of occasions in the past years, rapid rises in energy prices in particular, but also in food prices, have pushed up inflation. The rises were essentially related to supply factors, such as water shortages in hydroelectric power companies’ reservoirs. The effects were judged to be temporary, which also proved to be the case. •  During certain periods, not least recently but also in the latter part of the 1990s, imported inflation has been unexpectedly low. •  At the end of the 1990s and the beginning of this decade, productivity growth has been unexpectedly robust. It is interesting to note that during several periods when inflation was below target, monetary policy was clearly loose at the same time as GDP growth was high. But in spite of this, inflation has been too low. What has happened above all is that unexpected supply changes have dampened inflation. This has been a global phenomenon to a large extent; in other words, a situation that we have shared with other countries.