This could lead to higher growth being feasible for longer without inflation taking off. There are arguments in favour of each of these explanations but the empirical support is not clear-cut. The issue of potential growth and higher productivity has recently attracted particular attention in the light of economic developments in the United States, for example. Productivity growth in Sweden has improved but we do not yet have any notable evidence that potential growth has risen as it has in the American economy. An expected increase in trend productivity can also affect components of demand. The prospect of higher corporate profits leads to higher share prices for listed companies. Besides prompting companies to step up investment and improving the supply of venture capital, the appreciation of shareholdings may make households feel more wealthy and stimulate consumer demand. The strong upward stock market trend in Stockholm in recent years may be a sign that players have incorporated expectations that economic growth in Sweden will be appreciably higher than earlier. The relative paths of supply and demand in the Swedish economy and the development of the inflation propensity are obviously central issues in the assessment of inflation. If supply and demand develop at the same rate, no inflationary pressure will build up. This is what seems to have happened for a time in the United States. But there is, of course, a risk of one of them predominating and that would alter the conclusions for monetary policy.
A process was therefore initiated in November that amounts to successively taking our foot off the monetary “accelerator”. As the after-effects of the Asian crisis and the financial market turbulence in the autumn of 1998 subsided, a strong economic stimulus from monetary policy was no longer required. In November 1999 and February this year the repo rate was therefore increased by a total of 0.85 percentage points. The analytical and monetary policy challenges that confronted the Riksbank during 1999 were not minor. The strong growth of demand in recent years has been accompanied by paths for underlying and trend inflation that have been weaker than earlier relationships seemed to suggest. A number of reasons have been put forward as to why these relationships may have changed. One reason may be that when inflation has been brought down to a low level, price and wage setting behaviour is different. Households as well as firms in Sweden count on inflation remaining low. Another reason may be increased competition, for instance due to deregulations, globalisation and IT commerce. A third reason may be that our assessments of resource utilisation are faulty and the actual level is lower than we have assumed to date. Economic growth can then be higher for a time, without generating increased price pressure. A fourth reason may be a higher productivity trend and an ability to produce more goods and services without generating increased prices; in other words, a higher potential growth rate.