Alternatively, it can be said that an additional axis and thus an additional dimension are required that correspond to the sum of squared changes in the interest rate, so that the modified Taylor curve becomes a three-dimensional, bowl-shaped Taylor surface. Taylor curve for analysis ex ante applies instead to the sum of squares of the inflation-gap and output-gap forecasts ex ante. BIS Review 29/2009  7  A major difficulty in this analysis is that it may be unclear what is meant by stabilising the real economy. From a monetary policy perspective it is the stabilisation of resource utilisation rather than GDP growth that is relevant. This means stabilising resource utilisation around a normal level. The problem is that resource utilisation can be measured in several ways. A reasonable and commonly used measure of resource utilisation is the so-called output gap; that is the difference between actual production and potential production. However, potential production is not a magnitude that can be observed directly – it must be estimated. There is considerable uncertainty, both theoretically and empirically, about the best way to estimate and forecast potential production. The output gap shown in the figures is the so-called HP gap, which has significant weaknesses. 7 It is important and desirable from several points of view that the Riksbank and other central banks develop better and clearer measures of resource utilisation and potential production and that they publish their measurements and forecasts. Such work is underway at the Riksbank.
More stable inflation expectations shift the Taylor curve in Figure 3 closer to origin and make the balance between the stability of inflation and the stability of the real economy more favourable. As the central bank's inflation forecasts in the short and medium terms may deliberately deviate from the target, it is also interesting to compare inflation expectations with the central bank's inflation forecasts. If the economic agents share the central bank’s view of how inflation will approach the target, inflation expectations at different time horizons should be close to the central bank’s forecasts. The degree of correspondence between inflation expectations and the central bank's inflation forecasts then becomes a measure of how credible the central bank's inflation forecasts and analyses are. Such a correspondence between expectations and forecasts is of course also desirable for forecasts for the real economy and, not least, for forecasts for the policy rate, which I will now discuss. Was the implementation of monetary policy effective? I have spoken earlier about what characterises efficient monetary policy decisions. This was in relation to the balance between stabilising inflation and stabilising the real economy given the information available at the time of the decision. Another important aspect is to investigate how effective the implementation of monetary policy has been, in the sense of affecting the economy in the desired direction and to the right amount.