If actual and expected inflation vary less, this will entail fewer variations in real interest rates and real exchange rates. This may, in turn, allow for the more stable development of demand and, thereby, the real economy. Well-anchored inflation expectations also make it easier for monetary policy to  BIS Review 68/2010  5  stabilise the economy. Unless households and companies immediately adjust their inflation expectations upwards, a minor increase in the interest rate will be enough to prevent an inflationary impulse from becoming entrenched. And when substantial interest rate changes become less necessary, fluctuations in the real economy become less extensive than when inflation expectations are poorly anchored. One way of putting it is that well-anchored inflation expectations make it easier for central banks to take consideration of the real economy. For Sweden’s part, one important explanation for the increased macroeconomic stability is probably also that inflation targeting – together with a more long-term focus for fiscal policy – spelled the end of the uneven “stop-go” policy entailed by the many devaluations of the 1970s and 1980s. Quite simply, the stabilisation policy has shown more orderliness. To sum up, the manner in which monetary policy is conducted across the world has thus changed quite extensively in the last fifteen to twenty years. Within both the central bank world and among academic researchers, a great deal of effort has been expended upon attempting to find a solution for how monetary policy best should be formulated. These efforts have also borne fruit.
A continued recovery requires that this is accompanied by a broad and sustained increase in demand; otherwise the upswing is liable to be relatively brief. In this respect there may still be some uncertainty, mainly perhaps as regards the American economy. The economic imbalances in the United States are still large and stock-market values are high, both historically and in relation to the current cyclical phase. However, high productivity compared with the rest of the world may make these problems less troublesome. Household saving has admittedly become somewhat higher relative to disposable income since the end of last year but the level remains very low compared with earlier years. Unemployment continues to rise. Against this background there are grounds for expecting that growth in the coming years will not be as high as in the late 1990s. But as overall economic policy is expansionary, there should be a successive recovery during the second half-year, though of course there are both upside and downside risks. Turning now to Europe, there do not seem to be any clear signs of a strong recovery. Leading indicators admittedly point to a more positive business mood but the prospects for Germany – the largest economy in the euro area – are still uncertain and unemployment is rising from a high initial level. The euro area has not accumulated imbalances such as those in the United States and this may help to maintain a recovery once it has begun.