Lars E O Svensson: Differing views on monetary policy Speech by Prof Lars E O Svensson, Deputy Governor of the Sveriges Riksbank, at SNS/SIFR Finanspanel, Stockholm, 8 June 2012. *  *  *  I would like to thank Hans Dellmo, Karolina Ekholm, Gabriela Guibourg, Per Jansson, Stefan Laséen, Ulf Söderström, Staffan Viotti and Anders Vredin for valuable discussions and views. Pernilla Johansson, as well as Joanna Gerwin and Marianne Sterner at Sveriges Riksbank, has contributed to this speech. The views expressed are my own, and are not necessarily shared by the other members of the Riksbank’s Executive Board and other employees of the Riksbank. My view is that monetary policy should stabilise inflation around the inflation target and unemployment around a long-run sustainable rate. In my opinion, this mandate for monetary policy follows from the Sveriges Riksbank Act and the government bill that contained the proposal for this legislation. 1 According to the Sveriges Riksbank Act, the objective of monetary policy is to maintain price stability. The Government Bill states that the Riksbank should, without prejudice to the objective of price stability, support the objectives of general economic policy with the aim to achieve high employment. Accordingly, the mandate is to maintain price stability and to attain the highest possible sustainable employment. In practice, it is the same thing as stabilising inflation around the inflation target and unemployment around a long-run sustainable rate.
BIS central bankers’ speeches  13  A higher average unemployment rate by 0.8 percentage points over 15 years is of course a very large cost to the real economy of undershooting the inflation target. At present, a higher unemployment rate of 0.8 percentage points corresponds to around 40,000 jobs. In comparison, it can be mentioned that the government’s own calculations show that the four stages in the earned income tax credit and the changes in unemployment insurance reduce unemployment in the long run by 0.6 and 0.7 percentage points respectively. 17 The respective reforms are thus expected to have a slightly smaller effect on unemployment than the calculated real-economic cost of inflation on average undershooting the target over the past 15 years. Implications for future monetary policy Why average inflation in Sweden has undershot the target over the past 15 years is a separate and important question that requires thorough examination. I do not intend to discuss this here. But a clear conclusion for future monetary policy is that it is important that the Riksbank ensures that average inflation is actually close to 2 per cent over a longer period of time and that it does not fall as low as during the past 15 years. This means that the inflation target must be regarded as symmetrical and that it should constitute a central point for the fluctuations in inflation. One should thus not be more afraid of overshooting the target during a limited period than undershooting it.