The fourth lesson is the benefits to long-term growth and stability that come from disciplined policy management and the pursuance of policy that enhances flexibility in the economic system. The 1997–1998 crisis has been an important lesson for Asia on this point. Disciplined policy reduces the risk of an internally-induced crisis due to policy error and provides the authorities with greater room and flexibility to deal with unexpected events or shocks. In the current crisis, the ability of many Asian economies to respond aggressively to the impact of the crisis without undermining policy credibility is a case in point. From my own experience, policy discipline relates closely to decisions that are made with a long-term perspective. The lack of discipline more than often reflects policy that focuses overwhelmingly on short-term outcome. In economics, emphasis on short-term outcome tends to reduce volatility initially but a cost of a much larger volatility and welfare loss at a later date as the needed adjustment is postponed. A long-term perspective, on the other hand, allows the adjustment to be spread out with lesser volatility and effects on economic welfare. Next, enhancing flexibility in the economy through policy that raises the role of the price mechanism in the allocation of resources is another crucial policy choice that can make important differences to the economies of emerging markets. Again, we in Asia learned this lesson well in the 1990’s.
A clear lesson from events last spring is, in any event, the value for market observers of constructing independent forecasts of inflation as a foundation for their repo rate predictions. For the Riksbank, what happened has prompted us to work even more on continuously monitoring market opinions so as to be able to react in good time if the assessments of market players seem to be deviating from our own. Main scenario and balanced risks BIS Review 81/1998  -5-  Now for a look ahead in the context of our current assessment of inflation. In the latest Inflation Report, published at the end of September, the Riksbank emphasised that inflation prospects contained a large element of uncertainty. The cyclical picture had changed somewhat since June in that growth was judged to be strongest this year and then slacken somewhat. But we still counted on reasonably good activity, with annual growth in the coming years averaging almost 3 per cent. Inflation, measured as the 12-month change in the CPI, was assumed to be below 2 per cent in 1998 and 1998 but to reach approximately 2 per cent at the end of the period. The composition of demand had also undergone a shift. The international crisis was expected to render net exports weaker than assumed earlier, while domestic demand was likely to be somewhat stronger than foreseen in June.