This is because average unemployment is independent of monetary policy and the inflation rate. This is in turn because inflation expectations are assumed to adapt to actual inflation. The long-term Phillips curve, which illustrates the relationship between average inflation and average unemployment, then becomes vertical, and average unemployment thus becomes independent of the average inflation rate. In Sweden, however, inflation expectations as measured according to TNS Sifo Prospera’s survey have stabilised around 2 per cent, despite the average inflation rate being lower. This is illustrated in Figure 2, which shows the five-year average of expectations one and two years ahead for all of those interviewed from 1996. The Riksbank has thus succeeded in anchoring inflation expectations around 2 per cent, despite actual inflation being lower on average. That inflation expectations are anchored to the target is good, and makes it possible for the Riksbank to better stabilise unemployment without inflation fluctuating too much. 14  PCE stands for personal consumption expenditure. 15  CPIX/CPIF refers to CPIX inflation up to the end of the first quarter of 2008 ad CPIF inflation from the start of the second quarter of 2008. The CPIX excludes the effects of indirect taxes, subsidies and mortgage costs from the CPI. The CPIF excludes the direct effects on the CPI of changes in mortgage rates. The average CPIX/CPIF inflation is 0.4 percentage points lower than the target when measured using real-time data for the period 1997–2011.
There is thus hardly any support for low interest rates in themselves causing problems for financial stability or for high interest rates in themselves improving financial stability. 9 The current situation in Sweden is rather that higher policy rates may have a negative effect on financial stability. Swedish banks are now choosing to fund themselves by short-term borrowing in foreign currencies, which is cheaper than borrowing in Sweden as interest rates are higher here than abroad. But this entails some risks as foreign investors are an unstable source of funding (Sveriges Riksbank 2012a). When the policy rate in Sweden is raised in relation to interest rates abroad, it becomes even more attractive for the banks to borrow in  9  Is the United States an exception? Hardly. A very fragile financial sector arose there without resilience, as a result of a lack of regulation, exaggerated confidence in risk management, very excessive leverage, gigantic hidden off-balance sheet liabilities and large information problems with a large spread of uncertain assets. A modest shock in the form of loan losses due to untenable sub-prime mortgages with low-quality credit assessments then led to a major financial crisis. It was not low interest rates that led to this lack of resilience and to these untenable sub-prime loans, and it is difficult to see that higher interest rates would have prevented the crisis. 8  BIS central bankers’ speeches  foreign currency.