A recent instance is, for example, the run up to European monetary union and the attention this drew to Sweden’s commitments as a member of the European Union. Some observers believe that the Riksbank may have an (unacknowledged) exchange rate target. That is a misconception. The Riksbank does not target the krona’s exchange rate. In a flexible exchange rate regime with a price stability target, the exchange rate is admittedly a major factor, but only one of many factors that impinge on inflation. A permanent appreciation or depreciation of the krona affects inflationary pressure via import prices, for example. A given exchange rate trend may well support monetary policy’s drive for price stability; when this is not the case, however, the Riksbank has to intervene and adjust the repo rate. At the same time, the exchange rate is the price of an asset that is current throughout the economy; the value of the krona is highly important in many economic decisions, not least for export companies. This makes a stable exchange rate fundamentally desirable. It is then easier for all economic agents to make decisions. All else equal, this should lead to higher growth. BIS Review 47/1998  -5To this basic endeavour to keep the price of the krona stable should be added our European undertakings. As a member of the European Union we are committed to treating our exchange rate policy as a matter of common interest.
All this had a marked downward effect on domestic demand. The drop in output—almost 6 per cent in the course of three years—meant in turn that government finances worsened dramatically. From a surplus at 4.2 per cent of GDP in 1990, the budget balance swung to a deficit of 12.3 per cent in 1993. In this period, moreover, registered unemployment shot up from 1.7 to 8.2 per cent. In a way, the economic crisis in the early 1990s can be said to have been generated by political decisions. The combination of a stabilisation policy realignment with some structural reforms did play a part in the course of the crisis. But it should also be underscored that such measures were broadly essential. The problem was not so much the measures that were implemented when an inflationary bubble had already developed as the fact that policy had not been realigned earlier. In recent years, economic developments in Sweden have been favourable. Growth has been stronger than in the high phase in the late 1980s and it has proved possible to combine good growth with low inflation. A couple of years after the realignment of economic policy, inflation had fallen BIS Review 47/1998  -2sharply to around 3 per cent. Moreover, the reduction of current inflation has been accompanied by a downward revision of inflation expectations. Today, neither households, firms nor financial market agents perceive any serious threat from inflation in the coming five years.