Structural changes generate developments that are often referred to at present as a “new economy”. The marked improvement in productivity maintains profits and keeps prices down. During the transformation, a good circle is created but it is difficult to tell how long it will last. It can be described, if you like, as a period of extensive rationalisation and heightened efficiency. The growth trend is raised for an indefinite period, enabling the economy to expand more rapidly without inflation taking off. It should be born in mind that the adaptation to the new information technology does not occur automatically. It is not the case that one day we suddenly find the new technology has begun to be implemented in ways that are leaving their mark on economic developments in general. The late 19th century provides important lessons about the necessary conditions for this good circle. At the beginning of the 1800s Sweden was still a poor country with an unstable form of government, a chaotic monetary system and a general shortage of credit facilities. Ninety years later the Swedish economy had undergone a dramatic transformation. Inflation was low, with an orderly monetary system. The nation was bursting with vitality in every field. An impressive range of products, many of them world leaders, were being developed on the basis of Swedish inventions. Swedish financial experts were engaged in the exploitation of the inventions at an early stage. Employment was provided for more and more people, living standards rose and growth was among the highest in the world.
It has also to do with CPI being affected by price changes in components that cannot be related to the state of demand. This has been taken into consideration in the design of the main rule and in clarifications and expansions. There has been an endeavour to design the rules in such a way as to avoid unnecessarily large fluctuations in employment and output. However, there must never be any doubt that monetary policy is always governed by the inflation target, although different strategies to achieve this objective in practice can produce different economic costs in the form of fluctuations in output and employment. The fact that the target horizon is normally stated as 1-2 years is justified by the major fluctuations in output that can result from attempts to influence inflation in a shorter time perspective. Interest rates affect inflation with a time lag through effects on demand or the output gap and attain their greatest effect after 1-2 years. In order to reduce inflation in the short term, the interest rate would therefore have to be greatly increased with major negative effects on growth. If CPI is affected by factors that are unrelated to the demand situation, a monetary policy that strictly complies with the main rule can also lead to unnecessary variations in output and employment.