The fact that the coming pay negotiations are taking place in a situation where it is expected that there will be a high demand for labour increases the risk of the historical pattern being repeated. In some industries and regions there are indications that a shortage of labour is developing. However, it is at the same time important to bear in mind that we are a long way from the scarcity levels experienced at the end of the 1980s. Another challenge for wage formation is that the first pay negotiations taking place are for public sector employees. In this sector, there are large groups that have obviously fallen behind in their pay development, leading to shortages. Among these are certain categories of teachers and many health care employees. The Swedish labour market has not only had problems in dealing with pay balances between different occupations. It has also found it difficult to tackle regional imbalances in the same occupational category through adaptation of relative wages. Shortage of labour has, for instance, particularly affected big city areas, although it has hardly affected relative wages between areas where there is shortage and where there is unemployment, despite the cost of living and not least housing costs being lower outside the big cities. With a more flexible wage formation, the imbalances in the labour market would probably be reduced. Changes in a positive direction The starting situation for the pay negotiations is thus not unproblematic.
Targeting the price level directly, however, was generally considered not possible since the linkages between policy instruments and prices were somewhat uncertain and contained the long and variable lags. These problems led to two new issues which brought about a revolution in the approach to central banking. These are transparency and improved forecasting. Clearly, monetary policy is most effective in the presence of a firmly established nominal anchor, and the more understandable that anchor is to the public the better. An effective commitment to long-run price stability is just such a nominal anchor that the target rate of inflation communicates to the public the price level the central bank is aiming to achieve at specified dates in the future. Any move away from policy rules for long periods must face and deal with long and variable lags in the economy’s response to changes in policy stance. Improved modeling and forecasting is giving central banks increasing confidence in basing current policy decisions on expected future outcomes. When we sum up these developments in monetary policy, we need a monetary framework which includes the following components. It should be: •  transparent;  •  accountable;  •  predictable and easy-to-monitor; and  •  reliable. This is also why the IT (inflation targeting) countries introduced these institutional and operational features into their monetary policy frameworks. Before passing to the key issues for the success of IT regime, I would briefly like to focus on the basic key requirements of the inflation targeting framework in the literature.