Economic players simply count, with good reason, on the Riksbank acting if signs of rising inflation were to appear. In such a world, overall price formation centres above all on the level of economic activity. The improved credibility is thus a further factor that may have contributed to a level of inflation that is lower despite relatively strong growth. At the same time, the Riksbank has the major responsibility of keeping a close eye on the more long-term inflation expectations in order to maintain the credibility that has been built up in recent years. Demand assessments difficult A question that naturally has to be included in the assessments is whether the stronger growth of demand we have experienced, not least this year, will last. An important matter to bear in mind in this context is that as long as the monetary stance is expansionary, demand growth will normally be above its sustainable level. But some restrictive effect has, of course, already started to come from the higher bond rates in recent months. BIS Review 92/1999  4  However, both the Swedish and the international economy can be exposed to unforeseen shocks. We need to remember that no one foresaw either the extent or the course of the crisis in Asia. Neither was attention drawn at an early stage to the risks behind last autumn’s international financial unrest. Our knowledge about phenomena of this type is still limited. It may be asked whether we shall ever be capable of making definite predictions in this field.
How is the central bank to arrive at an interest rate increase that is appropriate in its timing as well as its size? A large, abrupt increase might lead to demand being curbed too early and too much, along with the risk of inflation falling below the price stability target of 2%1. That is naturally not desirable. Which brings me to the second question: What rate of GDP growth can the Swedish economy sustain without inflation taking off? How strongly can the Swedish economy grow? In situations involving rapid changes, there is a tendency to affix labels such as the new economy. The logical implication is the existence of an old economy that works less well. I find this misleading. There have been periods in Sweden’s economic history when the economy performed exceedingly well; one example is the 1950s and 1960s. There have also been periods that were less successful, for instance the 1970s and 1980s. The concept of a new economy might be apposite if the comparison is confined to the present and the preceding decade. There are signs that the Swedish economy is functioning better in the 1990s than it did in the 1980s. But what does this concept actually stand for? One of the many interpretations of the new economy is that long-term growth’s trajectory has shifted upwards on account of a better productivity trend. For a given input of the production factors labour and capital, the economy is able to sustain higher overall growth.