Households and companies may feel growing uncertainty both about developments in public revenues and expenditure, and about the formulation of monetary policy. This can be costly for the economy if it leads to a failure to carry out investments and to unnecessarily cautious decisions about the allocation of resources. To sum up, then, it becomes more costly to pursue an excessively expansive fiscal policy when monetary policy is guided by an explicit inflation target. A good policy mix makes for better conditions A better policy mix arises if the orientation of fiscal policy does not make for higher inflation risk premiums. It can avoid this if the orientation of fiscal policy appears to be sustainable in the long run. The surplus-target in the public finances is a good example of this. One means by which the confidence felt by the general public in economic policy can be monitored consists of inflation expectations, which should not diverge substantially from the Riksbank’s inflation target. When expectations of inflation diverge from this target in the longer term - whether upwards or downwards - it implies that monetary policy should be adjusted so as to steer expectations back towards the target. In this connection it is important to observe that a central bank whose inflation target commands high credibility often has more scope for acting than one that has little credibility. Assume, for example, that an economy where the credibility of the inflation target is high experiences a positive disturbance to the business cycle, leading to higher demand.
The Swedish economy is less open to competition than the American. For example, even adjusted for differences in value added taxes, the level of prices in Sweden is on average 15-20% higher than in the USA. Many deregulations that were carried out long ago in the USA, such as the deregulation of the transport sector, for example, have been carried through more recently in Sweden and there are many indications that we have not yet seen their full impact. However, competition in many markets is expected to increase in Sweden in the future, in part as a result of increased globalisation and European integration. One area in which very little has been done is the labour market, which is very rigid and regulated compared with the American. BIS Review 132/1999  4  –  Where the introduction of new technology is concerned, Sweden has gone further in this than many other OECD countries. For example, we have the highest number of Internet users per capita in the whole world. –  Like the American economy, the Swedish economy is very open to the world around it and Sweden has a long tradition of free trade. To some extent this counteracts the tendencies towards limited competition on the Swedish market. –  But on the other hand, as yet we have seen no clear indications in the statistics of the impact of the new economy.