Now that Sweden’s economy seems to be moving into a stronger phase, in large measure as a result of higher domestic activity, it is of the utmost importance that we do not land in a situation with wage drift and overheating as a consequence of an unduly expansionary fiscal stance. Against this background, I shall be talking today about the conditions for monetary policy and its interaction with fiscal policy and labour market developments. 1  BIS Review 77/1999  Interaction with fiscal policy Fiscal policy affects the chances of success in monetary policy in various ways: via its impact on general confidence in monetary policy, via short-run effects on demand and by modifying the longterm conditions for economic growth and low inflation. Let me begin with credibility. If the direction of fiscal policy is perceived as being unsustainable in the longer run, economic policy’s overall focus on low inflation and stable growth is liable to be questioned. Few industrialised countries have experienced this as recently and tangibly as Sweden. The massive budget deficits in the early 1990s, with rapidly accumulating government debt, made Sweden’s economic future uncertain and pushed interest rates up. With the consolidation of government finances, however, and the long-term ambitions for fiscal policy that the Government, supported by the Riksdag (Sweden’s Parliament), has presented, confidence has improved.
One of these factors is that economic agents look to the future when they make decisions about consumption and investments, wages and prices, and want to take account of economic policy not only as it is today, but also as they expect it to be tomorrow and in the future. This is particularly evident in foreign exchange and financial markets, where exchange and interest rates are influenced when participants shift large amounts partly on the basis of their expectations concerning economic policy and economic developments. Financial market expectations concerning economic policy are entirely different today from what they were 20-30 years ago. Behaviour can change from being very rational to herd behaviour. The issues that receive attention, and that govern movements in exchange and interest rates, change. It is thus important that the authorities do not sow doubt, but on the contrary act in a long-term and predictable manner. The authorities must be credible and inspire confidence. There must be a good match between the stated objectives of economic policy and what is actually done to achieve them. This is the most important reason why the implementation of monetary policy has been delegated to the central bank in Norway,  1  Cf. Official Norwegian Report (NOU) 1973:36 (price problems). BIS Review 50/2002  1  as has been the case in other comparable countries. In Norway, the responsibility for interest rate decisions was delegated to Norges Bank in 1986. The other factor is the special challenges to stabilisation policy posed by petroleum revenues.