Both when the bank aims at the quantity of money and inflation, it works with a so-called intermediary target, as inflation control has in view an inflation forecast that can diverge from actual inflation, just as the growth of the quantity of money can diverge from inflation. This shows that the difference is inconsiderable between the two approaches in practice. Banks with an inflation target also study changes in the quantity of money when they make inflation forecasts. Banks that say that they have a quantity of money target deviate from this without ceremony when it clearly leads in the wrong direction taking into consideration the inflation forecasts that the banks also work with. 4. Confidence There is great benefit in publishing an inflation forecast. The general public can then see how the bank assesses inflation in one or two years’ time, how well founded the forecast is, and how policy is carried out in relation to the forecast that has been made. The Riksbank’s task has been laid down by the Swedish people through a Riksdag decision, as I mentioned to begin with, namely to maintain a fixed monetary value. To that end, the Riksbank has been made autonomous, so-called autonomy of means. However, the Riksbank is responsible to the Riksdag for its policy by presenting an account of its policy twice a year to the Parliamentary Standing Committee on Finance.
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.