One conceivable explanation is that, having waited longer than other countries, the road back to price stability was more difficult for us. There were also a number of exceptional events along the way. What was perhaps the worst bank crisis of the century erupted in the wake of the 1980s’ bubble economy. Exchange rate turmoil was such that, during some dramatic days, the instrumental rate was hiked to 500 per cent. In the early 1990s the budget deficit grew to be the largest in the industrialised world. There are many similarities, as well as some differences, between the financial crisis in Sweden and those in Mexico and Southeast Asia. In recent years the situation in Sweden has become more stable and, with a resolute economic policy, developments have taken a positive turn. The bank crisis has been resolved, the economy is in an expansionary phase and inflation expectations are low. Step by step, the credibility of the new regime is being established. Experience in other countries clearly shows that the consolidation of a changeover to a low-inflation regime takes many years. Inflation target’s historical roots and advantages The idea of focusing monetary policy on price stability goes back, as I mentioned earlier, at least to Wiksell’s arguments a century ago. It seems to me that Wiksell’s emphasis on deflation being as important to avoid as inflation has much to do with the acceptance of this policy today.
One thing is clear: the sounder the theoretical foundation for monetary policy, the easier is the life of a central bank governor. Sweden on the way to establishing price stability There has been something paradoxical about Swedish economic policy. After the period of generally high inflation that started with OPEC 1, Sweden was one of the last of the industrialised countries to re-focus economic policy on price stability. The notion that a trade-off exists between inflation and unemployment lived on in Sweden for longer than in other countries. It took rather a long time for the drawbacks of a level of inflation that was relatively high, for an industrialised country, to be widely recognised. At the same time, Sweden has a long tradition in the field of central banking. The Riksbank, founded in 1668, is the world’s oldest, still-functioning central bank. This gives us three hundred and thirty years experience. It was in Sweden, too, that the first banknotes—in Europe at least—were introduced in the seventeenth century. A monetary policy focus on price stability, which is one of the themes for our forthcoming discussions, has always been an important item on the central bank policy agenda. A well-known Swedish economist, Knut Wiksell, was a clear exponent of the idea in the late nineteenth century. As it happens, he addressed an audience on the subject here in Stockholm a hundred years ago almost to the day, namely on 14 April 1898.