The narrower the gap between actual production and the capacity ceiling and the lower unemployment happens to be in relation to its equilibrium level, the greater will be the risk of higher inflation. From this also follows a need to know whether the equilibrium level of unemployment has risen. If that is the case, measures should be taken specifically to lower the equilibrium level, a task that is outside the scope of monetary policy. Where is unemployment’s equilibrium level? What is unemployment’s current equilibrium level in Sweden? As always when one goes from a theoretical analysis to practical economics, everything becomes much more complex. Unemployment’s equilibrium level is not an observable quantity. One has to make do with estimates and their inevitable uncertainty means that interpretations have to be cautious. The available estimates suggest that equilibrium unemployment in Sweden moved up in the early 1990s and, in terms of registered unemployment, is now somewhere in the interval between 4.5 and 7.5 per cent.3 The OECD also counts on a marked increase in the 1990s; in the latest report on Sweden the current level is put at between 6 and 7 per cent.4 There is not, in fact, complete agreement that equilibrium unemployment has moved up sharply.5 But what suggests that it has, even though we cannot be sure of its exact level, is that otherwise the high unemployment should have acted as a strong restraint on wage formation. The actual development of wages does not indicate this. 3  See e.g.
In addition, the relatively steep yield curve and the re-emergence of risk appetite, reflected particularly in the increase in stock prices over the past few months, may have dampened M3 growth to some extent. The overall flow of bank loans to the non-financial private sector remained subdued in July, with the differences across borrowing sectors becoming more marked. The flow of loans to households remained slightly positive, whereas in the case of non-financial corporations the flow of loans was negative again. The decline in loans to non-financial corporations continues to reflect mainly a strong net redemption of loans with a shorter maturity, while lending and borrowing at longer maturities remained positive. The fall in production and trade and the ongoing uncertainty in the business outlook are likely to have dampened firms’ demand for financing. Given the normal lag between a recovery in economic activity and a pick-up in  2  BIS Review 102/2009  loans to enterprises, further weak developments in loans to non-financial corporations in the coming months appear likely. At the same time, a gradual improvement in financing conditions, as lower market interest rates continue to be passed on in lower bank lending rates, should support the demand for credit in the period ahead. Against the background of highly demanding challenges, banks should take appropriate measures to strengthen further their capital bases and, where necessary, take full advantage of government measures to support the financial sector, particularly as regards recapitalisation.