Mr Heikensten speaks on monetary policy with a focus on exchange rate Speech by the Deputy Governor of the Bank of Sweden, Mr Lars Heikensten, to Riksbank’s primary dealers in Stockholm on 19 April 1999. Since November 1992, when the defence of the krona’s fixed exchange rate was abandoned, much of the discussion concerning monetary policy has involved the exchange rate. At this traditional meeting with the Riksbank’s primary dealers, I should like to consider four issues connected with Sweden’s currency. One of these issues is the function of the krona in a monetary policy regime that targets inflation with a flexible exchange rate. Another issue is the actual path of the exchange rate in recent years and the conclusions it warrants. The euro’s introduction at the beginning of January has revived the question of Sweden’s participation in EMU; this raises the other two issues, namely the process towards ERM membership, if this is envisaged, and aspects of setting the future ERM rate that would then ensue. Monetary policy significance of the exchange rate The floating exchange rate regime that was introduced for the Swedish krona in November 1992 was regarded by many people as a fairly temporary arrangement. They considered that for Sweden, as a small country dependent on foreign trade, a fixed exchange rate was most advantageous, so the Riksbank ought to try to reintroduce a fixed rate regime as soon as possible.
But, the slow process of decision making in Europe, the difficulties of policy implementation and the debate around the burden-sharing of the crisis have limited the positive effects of those policies on confidence and credibility. In this setting, the ECB and the Eurosystem have played a central role. While safeguarding their paramount objective of price stability, their actions have been directed to re- establish the proper functioning of the transmission mechanism of monetary policy, as shown by the recent decisions by the Governing Council on the O[utright] M[onetary] T[ransactions] initiative. Some big steps have been taken on the institutional front at the European level. Fiscal rules have been strengthened and refined, governance reinforced and, in the financial sphere, great progress is being made to establish a common supervisory framework. In parallel, national constitutions have been adapted in several countries – Germany, Spain and others – to comply with these new requirements. This overview of the problems and challenges in Europe may be compared with the evolution of Latin America during the crisis and its aftermath. The Latin American performance during the crisis shows that these countries have drawn the lessons from the similar episodes they went through in the late nineties and early 2000’s. In particular, I would highlight two characteristics of the economic setting that has made the region so resilient to the external shock this time: the improved macroeconomic framework – underpinned by price stability – and the reinforcement of financial stability.