They basically have to do with the principles that monetary policy decision-makers have to choose between when productivity growth accelerates. One possibility, given that the economy is in equilibrium, is to let output growth exceed the potential rate for a time. This leads to a temporary fall in unemployment but the direct dampening effect is so strong that inflation can be held in the vicinity of the target. This alternative presumably requires an instrumental rate that is kept at a comparatively low level. The other possibility, given that the economy is benefiting from the rising productivity growth, is to let output growth match the new, higher potential rate. Unemployment is then unchanged and the direct dampening effect is left to work through so that inflation falls below the target without this having any consequences for monetary policy. The two alternatives thus amount to choosing a temporarily lower level of either unemployment or inflation, or a combination of the two, during the actual process of adjustment. Taken literally, the Riksbank’s rule of action tells us that a temporarily lower level of unemployment is not the "correct" choice. Monetary policy should instead be sufficiently stimulatory to keep inflation close to the target. In other words, the central bank should let the economy grow faster than the potential rate and pave the way for a temporary fall in unemployment. In this context, however, an unduly rigid interpretation of monetary policy’s rule of action can be risky. Let me explain why.
However, for a production increase brought about by adjustment in stocks to be durable, it must be supported by a lasting increase in demand. Household consumption continued to increase, but there was no upturn in investment. The imbalances in trade and industry in the USA were perhaps more tangible than many had anticipated. Bankruptcies and accounting scandals created further unease on the financial markets, which then fell at a rate reminiscent of the 1930s crisis. In Europe the signs of economic recovery mainly concerned more optimistic expectations; expectations which were not later realised. The largest euro economy, Germany, in particular proved to be in a poorer condition than anticipated. However, here it was not a question of imbalances like those in the USA, but structural problems, such as a high level of unemployment that had set in and weak public finances, which made it difficult to conduct an economic policy that would support the business climate. Furthermore, the expected supporting forces from the other side of the Atlantic for the export industry were weaker the expected. In Sweden, the slowdown during 2001 had a limited effect on unemployment. The Riksbank’s calculations at the beginning of 2002 indicated that resource utilisation was relatively strained. Economic policy had a stimulating effect on the economy, through lower taxes and higher transfers.