Since its introduction in 1993, however, the inflation target has proved to be a good compass for achieving and maintaining price stability. Confidence in the monetary policy regime has gradually grown and now seems to be firm. Inflation and inflation expectations are low. Since the cyclical upturn in the summer of 1993, annual GDP growth has averaged almost 3 per cent, government finances have been rapidly consolidated and Sweden has begun to repay external debt. Important forecasting variable During lengthy periods of financial unrest and problems with confidence in Sweden’s economy the Riksbank judged that the krona was undervalued. At times, moreover, the exchange rate fluctuations have been relatively marked, even after it seemed that economic policy’s credibility had been established. In the period since the fixed exchange rate was abandoned the Riksbank has not targeted the exchange rate. For monetary policy, the primary consideration since 1992 has been the picture of inflation prospects in relation to the targeted rate of 2 per cent. But the exchange rate is still one important factor in the Riksbank’s assessment of inflation. An exchange rate movement that is judged to have consequences for inflation prospects will accordingly influence the formation of monetary policy, ultimately the level at which the Riksbank sets the repo rate. The exchange rate normally affects inflation through import prices as well as via foreign trade and resource utilisation. All else equal, a weak exchange rate will lead in theory to higher import prices and thereby to higher consumer prices.
The Government may therefore raise the question of membership of the fixed exchange rate mechanism when future participation in the monetary union is judged to be imminent. Government decides exchange rate system, the Riksbank its application As regards ERM2, what are the Government and the Riksbank, respectively, responsible for? The Riksbank Act, amended as of 1999, states that the exchange rate system is decided by the Government and applied by the Riksbank. This is the same arrangement as in virtually the whole of Europe. The decision as to whether and when the krona is to be linked to ERM2 is thus a matter for the Government. The Riksbank in turn determines how the exchange rate system chosen by the Government is to be applied, which involves setting the central rate and band width in a fixed exchange rate system and deciding any interventions. In practice, if Sweden is to participate in ERM2, the law requires the involvement of both the Government and the Riksbank. They must also agree on the conditions. Moreover, ERM2 membership would not be decided unilaterally by Sweden; it is something that has to be negotiated with the other EU countries. n the event of Sweden wishing to join ERM2, what would be the procedure? The negotiations would be conducted in the Economic and Financial Committee, which has succeeded the Monetary Committee. Each country is represented there at the level of under-secretary in the Finance Ministry and central bank deputy governor.