Lars Heikensten: Six monetary policy issues  Speech by Mr Lars Heikensten, First Deputy Governor of the Sveriges Riksbank, at Umeå School of Business and Economics, in Umeå, on 7 November 2000. *  *  *  First a word of thanks for the invitation to visit Umeå and talk about monetary policy. The Swedish economy is developing favourably. Growth has been impressive in recent years, averaging around 3% in annual terms, and at present the rate may be even higher. This has contributed to a rapid reduction of unemployment and strongly rising employment. A look at the statistics shows that the present expansion of employment in Sweden is the fastest since the labour force surveys were first published in the early 1960s. And although growth has been strong, inflation has remained moderate. The explanations for the good circle in which our economy is now moving are not simple. But I do believe that one contributory factor is the realignment of economic policy that has been achieved in the past ten to fifteen years. This has involved deregulating the credit and foreign exchange markets, modifying components of the transfers system and paving the way for stronger competition. All this has helped to improve the workings of the economy. Another factor, perhaps the most important, has been economic policy’s commitment to stability, with price stability as a statutory objective and a successful consolidation of the public finances.
We know from experience that wages rise, sometimes so much that they generate inflation. Downward wage adjustments are less frequent. Seen from this angle, inflation might be regarded as a smooth way of achieving necessary adjustments to real business costs. Another risk, according to some observers, is that an unduly low inflation target leaves too small a margin for monetary policy. The economy is liable to land in a situation where the central bank is no longer in a position to influence the development of prices by pushing the real interest rate down. It simply is not possible to reduce the interest rate below zero per cent. As I see it, the Riksbank’s decision to target a specific annual rate of inflation and implement its policy symmetrically has eliminated a large part of the risk of our being caught in a deflationary spiral and the dilemma of zero interest rates. Everyone knows we strive to bring inflation back to the targeted level of 2%. Inflation expectations in recent years have in fact been stable around the 2% target. A specific target also means that the labour market parties know the rules of the game, which I believe has promoted reforms in wage formation. To a large extent, wage demands are now drawn up on the premise of inflation being 2%. All in all, I see no grounds today for reconsidering our 2% target. The objections in the literature to a target around 2% seem to be less relevant if anything than they were some years ago.