We began discussing whether this would be an appropriate direction to take as early as last spring. The Governor of the Riksbank also signalled in several speeches made in spring 2006 that there was reason to look more closely into this possibility. It is my hope that with this change we will become more open and clear in our communication and that it will make it even easier for the general public to understand how we reason when making our monetary policy decisions. Let me describe the background to the changes we are now making in the monetary policy analysis and our communication. Modern monetary policy is based on openness and clarity Monetary policy today is largely concerned with influencing the economy through expectations. There is therefore good reason for the central bank to be clear about how it views future developments in inflation and also the real economy. Modern academic research into monetary policy also indicates that monetary policy functions better the clearer and more open the central bank is with regard to its forecasts and monetary policy considerations. One question that has been much discussed in recent years both in academic circles and the central banking world is how clear central banks with a price stability target should be with regard to their own view of future developments in the policy rate. This discussion is also connected with which assumption for the policy rate the central bank should use when making forecasts of inflation and the real economy.
This should not come as a surprise, since it is much easier to sustain a high level of employment protection in an industry if competitors are kept out of its market. Therefore, amendments to employment protection legislation should be considered in relation to the implementation of product market reforms to promote competition. Fostering, promoting competition in product markets will facilitate the implementation of labour market reforms. These arguments suggest that the envisaged policy actions in line with the Lisbon strategy aimed at improving the functioning of labour and product markets – and the review of the institutions that determine their organisation which this reform agenda entails – can be expected to have mutually reinforcing beneficial effects on the performance of the economy. The improvement in labour utilisation in the euro area witnessed in recent years partly reflects the favourable effects of past labour market reforms. However, when looking at the levels of unemployment and labour force participation rates, it is clear that, despite the progress made, further improvements on both of these labour market fronts are possible and urgently needed. 2  See, inter alia, Nicoletti et al. (2000) and Nickell and Nunziata (2001). 3  See Bassanini and Duval (2006). BIS Review 43/2007  5  IV.2. Values, preferences and economic culture  Institutions that are inappropriately designed are thus at least partly responsible for the unsatisfactory performance of the European economy.