In my view, these last two factors have probably pushed up the NAIRU by 0.5 to 1 percentage point on top of the about 1 percentage point effect of extended unemployment benefits, which is likely to be a temporary effect. Taken together, this suggests that the current NAIRU might be between 6 percent and 7 percent. Although undesirable, this rise should not create concern about the medium-term inflation outlook. First, even the higher estimate of NAIRU is still far below the current unemployment rate of 9 percent. Second, as discussed above, much of this rise is likely to be temporary rather than permanent. As the labor market improves, the extension of unemployment claims benefits will almost certainly be allowed to lapse. When this occurs, the NAIRU is likely to drop back to somewhere in the region of 5 percent to 6 percent. Third, some of the evidence that the NAIRU has increased is not particularly compelling. For example, the loop in the Beveridge curve that is evident now has been seen in past business  4  BIS central bankers’ speeches  cycles – cycles in which there was no persistent rise in the NAIRU. This strongly suggests that the rise in job mismatch has a cyclical component. Fourth, the 9 percent unemployment rate may understate the amount of labor market slack. That is because the labor participation rate has fallen sharply.
The krona’s role changed in the 1990s In the period since the fixed exchange rate was abandoned the Riksbank has not targeted the level of the krona. For monetary policy the primary consideration is how inflation prospects relate to the 2 per cent inflation target. But in the Riksbank’s assessment of inflation the exchange rate is, of course, an important factor. Through producer and consumer prices for imported goods and services, the exchange rate has a direct effect on inflation that normally is comparatively rapid. Moreover, the exchange rate influences inflationary pressure indirectly and usually with a longer lag via effects on the level of economic activity. All else equal, a weaker exchange rate leads to stronger demand for Swedish goods and services and thereby to rising resource utilisation. The exchange rate can also influence inflation expectations indirectly, with effects in the first place on price setting. Since the Riksbank introduced the inflation target, our view of the exchange rate and inflation has changed by degrees. In the early years with a flexible exchange rate, monetary policy was influenced a good deal in practice by short-run exchange rate fluctuations. The focus then shifted and today it is clearer that what matters for monetary policy is the entire path of the exchange rate and inflation in the coming years. The monetary policy reaction to a shift in the exchange rate depends on the cause of the shift, its perceived duration and the economic situation in general.