It can therefore be said that employment and capacity utilisation directly affect the Government’s monetary policy to the extent that compliance with the inflation target only takes place gradually within a period of two years. This is to avoid too great fluctuations in the real economy – in employment and capacity utilisation otherwise. However, unemployment and capacity utilisation affect inflation and are therefore included as components of inflation forecasts. These circumstances therefore also play an indirect role for the Riksbank’s monetary policy. The exchange rate is not an objective for Riksbank policy although it also has a direct and indirect effect on inflation. An appreciation of the exchange rate will have, all other things being equal, an immediately dampening effect on import prices. As import prices are included in CPI, inflation will be reduced. The exchange rate will affect inflation indirectly by affecting demand. A higher real exchange rate reduces exports and thereby reduces the level of activity with some time lag. This indirect effect tends to reduce inflation in the somewhat longer run. Supply is also affected by the exchange rate in time by (initially) affecting import and export prices, which eventually spreads to other prices and wages. By the direct and indirect effect of the exchange rate on inflation, the exchange rate plays a role for the Riksbank’s policy in those cases when a change in the exchange rate is expected to be, or proves to be durable.
A good illustration of this is the industrial worker’s wage in 1975 and 1994. In 1975, an industrial worker earned 27 kronor per hour on average while in 1994 the hourly wage was SEK 95. However, if 1975’s hourly wage is recalculated at the 1994 price level, the 1975 wage was worth SEK 107 in 1994. Thus, twenty years of trade union struggle when nominal wages rose by an average of 6.9 per cent per year, resulted in a decline in real wages of 12 kronor per hour in 1994’s prices. However, it was not just trade union policy that failed. It was just as much a failure for the Government’s stabilisation policy. How could it have been so bad? Stabilisation policy activism The large devaluation of 16 per cent that the newly-appointed Palme Government carried out in October 1982 was what could be called an offensive (aggressive) devaluation, on top of that that had taken place in 1981. Through the 10 per cent devaluation in 1981, the real cost situation had been somewhat normalised and the competitiveness of Swedish industry restored. Now Sweden was to get off to a flying start. This was also the case as there was an upswing in the USA at that time and an exceptional long boom.