As I have just noted, this is also a feature of the recent strategy changes of the Federal Reserve and ECB. As a slight digression, it may be interesting to note that the tendency to see the inflation target as merely the Riksbank’s concern is not a new phenomenon. Urban Bäckström, Governor of the Riksbank 1994–2002, already pointed out this problem during the National Economic Association’s negotiations in February 1995: “I object to the title of today’s discussion, which is ‘The Riksbank’s inflation target’. Although it is natural for a central bank to strive for price stability, this endeavour must … permeate the entire economic policy.”20 At the time, the problem was the other way around, that is, more policy areas had to help keep inflation down. However, since the purpose of an inflation target is to anchor inflation at a certain level, rather than for it to be as low as possible, the argument is certainly valid even when inflation risks becoming persistently too low. Several good reasons for a more active fiscal policy In recent years, maintaining confidence in the inflation target has primarily been a matter of ensuring that monetary policy can continue to be used in the future to counteract recessions and increased unemployment – and thus provide support to fiscal policy in bad times.
The krona was put under strong pressure by investors who expected Sweden to devalue again soon and, in November 1992, the Riksbank was forced to give up its defence of the fixed exchange rate. New policy with emphasis on long-term anchors The consequences of the crisis emphasised, with all desired clarity, that the type of policy Sweden had pursued for a number of decades had reached the end of the road and needed to be fundamentally reshaped. Instead of defending a fixed exchange rate, the task of monetary policy from now on would be to keep inflation low and stable. For its part, fiscal policy would focus considerably more than previously on keeping public finances in good condition so as to maintain market confidence. Gradually, the new order was confirmed through changes in the fiscal and monetary policy frameworks. The price stability target, which, in practice, had been introduced in 1993 in the form of an inflation target, was written into law in 1999, at the same time as monetary policy decisions were delegated to an independent Executive Board. In fiscal policy, the budget process was changed so that it would be easier to gain control over expenditure developments, while public net lending would, on average, show a surplus. The purpose of the latter was, of course, largely to bring the rampant government debt under control and to restore confidence in public finances.