For a couple of decades we had failed to keep price and wage increases in check. However, a fixed exchange rate relationship is not, of course, compatible with an inflation rate that systematically exceeds that in the country to which the exchange rate is tied – sooner or later the exchange rate relationship must collapse. The rapid increases in wages and prices also repeatedly came into collision with the fixed exchange rate and the result was that the Swedish currency was devaluated on several occasions from the mid-1970s onwards. The economy was thus characterised by "boom-bust-cycles” with alternate strong acceleration and sudden braking. However, the fact that the fixed exchange rate did not work as a nominal anchor in Sweden does not mean that it could not function well in other countries; it has unquestionably done so in many cases. So let me therefore move on and mention some general advantages and disadvantages of the two methods 3 . 2  See Easterly, W. and S. Fischer, (2001), “Inflation and the Poor”, Journal of Money, Credit, and Banking 33, 2 (part 1), 160178. For a more detailed account of the advantages of low, stable inflation, see for instance King, M., (2002), ”The Inflation Target Ten Years On”, Speech at the London School of Economics, November 19. 3  A more detailed discussion of the advantages and disadvantages of these and other monetary policy regimes can be found in, for instance, Mishkin, F.S., (1999), ”International Experiences with Different Monetary Policy Regimes”, Journal of Monetary Economics 43, 579-605.
As a result, the ECB has a clearer and more credible inflation target, since this 2% target eliminates the possible impression of asymmetry that could stem from the previous target (“below, but close, to 2%”) and seeks to provide a clear anchor for inflation expectations. As I will highlight later on in my talk, this definition also confirms the medium-term orientation of monetary policy that already existed under the previous strategy. This medium-term orientation provides room for inevitable short-term deviations of inflation from the target, as well as for lags and uncertainty in the transmission of monetary policy. Moreover, the flexibility embedded in this medium-term orientation also allows for an appropriate monetary 5  policy response to inflation deviations from the target that takes into account the origin, scale and persistence of the underlying shocks to inflation. Second, the ECB has taken into account the monetary policy implications of the lower bound on interest rates. In particular, the new strategy establishes a requirement for especially forceful or persistent monetary measures when the economy is close to the effective lower bound, in order to prevent negative deviations from the inflation target from becoming entrenched. This may also imply a transitory period of overshooting in which inflation is moderately above target. I will also refer to this key aspect of the new strategy in the third part of my talk today. And third, the ECB has made explicit that the set of policy rates remains its primary monetary policy instrument.