The interest rate differential shows the difference between Swedish and German 10-year government bond yields. Sources: Macrobond Financial and the Swedish National Debt Office. The overall picture is that the reforms implemented have benefited Sweden well. Both companies and households have benefited greatly. The economy has functioned better and prosperity has increased. Let me highlight three lessons from the crisis and subsequent reforms: First, well-functioning frameworks make crisis management easier. Sweden was well equipped to deal with the economic consequences of both the financial crisis and the pandemic. Both fiscal policy and monetary policy could contribute to counteracting the economic slowdown and help the recovery in the Swedish economy on these occasions. Sweden therefore managed the economic effects of both the financial crisis and the pandemic better than many other countries in the western world. Second, one must be careful about declaring that things will look a certain way for all time, even if that has been the case for a while. Too much consensus on the possibilities of the fixed exchange rate thirty years ago meant that it took too long to embark on a more favourable economic path. More recently, we have seen that inflation was not ‘dead’ as some commentators argued not very long ago, and a monetary policy with low interest rates and bond purchases was not something that lasted forever (‘low for long’ and ‘QE infinity’). Third, reforms are painful in the short term, but often produce faster and greater results than expected.
As such, there is a great need for policy coordination among them to ensure an orderly supply of global liquidity. In the worst-case scenario, the multi-polar system could be more unstable especially during crisis periods. This is because the reserve currencies are close substitutes among themselves. As such, deterioration in the financial position of one reserve-issuing country could lead to severe capital flight, causing volatility in both exchange rates and asset prices. At this point, it is difficult to foresee if the management of global liquidity in the multi-polar system would be easier or more difficult than the current system. 8. As the multi-polar system is not immune from capital flow volatility, I would like to make a brief comment on recent IMF framework on capital flow management measures. While we support the work of the IMF in conducting empirical study on country experiences in managing surges of capital inflows, we do not support any rules-based approach in dealing with capital flow issues. Policymakers should be able to respond to such challenge in a pragmatic rather than rules-based manner. 9. Let me finish my talk with some comment on the SDR. In theory, there are many good reasons to enhance the role of SDR as one of its distinct advantages is the possibility of managing global liquidity without affecting the value of currencies in the basket. In addition, the basket also has the diversification advantage as the system will be less exposed to shocks in any of its constituent economies.