This is currently my best assessment of the sustainable rate of unemployment in Sweden after having read a number of papers on the subject and having discussed the issue with several specialists in the field of labour market economics. 12 The lower repo-rate path is also better if one assumes a level of 6 per cent. 13 At a press meeting on 3 March, the Minister of Finance, Anders Borg, announced that the Ministry’s assessment of the equilibrium rate of unemployment has been revised downwards from 6 per cent to approximately 5 per cent by 2015. 14 The Ministry of Finance plans to publish its calculations in a ministry memorandum in connection with the spring budget bill 2011. One could perhaps object that it is not certain that the lower repo-rate path in panel a of Figure 8 is necessarily the best repo-rate path. It does, however, appear to fulfil the Qvigstad condition in that the inflation gap in panel c is mainly positive and the unemployment gap in panel d is also positive (for the entire forecast period if the sustainable rate of unemployment is 5.5 per cent and for most of the forecast period if it is 6 per cent). One can show that an even lower repo-rate path leads to a lower mean squared gap for unemployment but to a higher mean squared gap for inflation. It is thus no easy matter to stabilise both better. However, a somewhat different profile for the low repo-rate path may perhaps provide a better result.
The repo-rate path chosen by the majority does not meet the well-known necessary but not sufficient condition for a well-balanced monetary policy formulated by the Deputy Governor of the Norwegian central bank Jan Qvigstad (2005). Applied to inflation and unemployment, this condition means that the inflation gap (the difference between inflation and the inflation target) and the unemployment gap should have the same sign. As the inflation gap is negative and the unemployment gap is positive for the majority’s repo-rate path for most of the forecast interval, this condition is not met. With a lower repo-rate path, on the other hand, the gap for both would be reduced and target attainment for both inflation and unemployment would thus increase. The fact that monetary policy is not well-balanced for the majority’s repo-rate path is clearly demonstrated if one uses mean square gaps to measure target attainment as in Figures 7 and 8. Figure 7 shows the forecasts for the CPIF and unemployment that are compatible with the main scenario’s repo-rate path and the higher and lower repo-rate paths published in Chapter 2 of the Monetary Policy Report in February. Panel b shows that the repo-rate path of the main scenario does not meet the Qvigstad condition. Neither is it effective, as a lower repo-rate path stabilises both inflation and unemployment better. Figure 8 shows the main scenario’s repo-rate path and the lower path that Karolina Ekholm and I advocated at the meeting.