Because of the long lag before monetary policy changes elicit effects, parrying this impact from import prices would have required the Riksbank to identify the Asian crisis’ damping consequences for commodity prices long before they actually occurred. But the weak development of import prices is not the only explanation. Inflation in this period was lowered still further by changes in interest expenditure as well as in indirect taxes and subsidies. On several occasions I have shown the Committee how monetary policy exerts direct effects on CPI inflation through house mortgage interest expenditure. Reducing the interest rate, in order to stimulate demand and thereby hold inflation around the target, has the initial effect of lowering the CPI because house mortgage interest expenditure decreases. This effect continues until after households have renewed the loans at the new, lower interest rate. The greater part of the difference between the CPI and UND1X in Diagram 1 is due to this interest rate effect. The Riksbank has considered the possibility of using some other index for targeting monetary policy but we concluded that there are grounds for continuing with the CPI as the overriding policy target. Among other things, the index is well known and relatively comprehensive. In the light of the problems I mentioned and the ensuing discussion, the Riksbank has chosen to present a clearer description of how the CPI target is to be interpreted.
Lars E O Svensson: Monetary policy, debt and unemployment Speech by Prof Lars E O Svensson, Deputy Governor of the Sveriges Riksbank, at a meeting at SNS – Centre for Business and Policy Studies, Stockholm, 14 November 2012. *  *  *  I would like to thank Karolina Ekholm, Kerstin Hallsten, Per Jansson, Christina Nyman, Ulf Söderström and Anders Vredin for valuable discussions and comments. Mikael Apel, Gabriela Guibourg and Staffan Viotti have contributed to this speech. The views expressed are my own, and are not necessarily shared by the other members of the Executive Board or by other employees of the Riksbank. It can scarcely have escaped the attention of those who follow monetary policy in Sweden that the members of the Executive Board have held differing opinions for some time now. Most people have probably also noted that a minority of the Executive Board members – consisting of my colleague Karolina Ekholm and myself, in case anyone was not aware of this – has advocated a more expansionary monetary policy than the one that has been conducted and that the Riksbank intends to conduct in accordance with the repo-rate path advocated by the majority during the coming period. However, I am not as convinced that everyone has a clear idea of exactly what the differences of opinion entail.