Mr Bergström gives a speech on the Swedish economy: new or old? Speech by Mr Villy Bergström, Deputy Governor of Sveriges Riksbank, at Kommuninvest, Stockholm, on 1 March 2000. *  *  *  The Swedish upswing has now begun in earnest and GDP growth is estimated at around 3.5% per year during the next few years. In the course of 1999, it became increasingly clear that we were on the verge of an upswing. The negative atmosphere after the Asian crisis, the Russian suspension of payments and the problems in the hedge fund, Long Term Capital Management, had subsided and been replaced by optimism in many countries. The fact that the financial crises did not have such negative effects on demand as many had feared can probably be partly accounted for by the relaxation of monetary policy introduced by many central banks. The Riksbank was among these, reducing the repo rate from 4.4 to 2.9% between spring 1998 and spring 1999. When the scenario of the Swedish upswing was confirmed and as resource use was accordingly expected to increase, it was natural to conduct a slightly more cautious monetary policy to avoid inflation accelerating. Since November, the Riksbank has therefore increased the repo rate by 0.85 percentage points to 3.75. However, this is still an expansive monetary policy in the sense that the short real interest rates are so low that they should stimulate demand.
In the 1980s and 1990s, central banks in many countries are granted greater independence from the political authorities. This mitigates the time-inconsistency problem. Central banks can – and should – make unpopular decisions when necessary. Central banks are given the responsibility for ensuring low and stable inflation. An explicit numerical inflation target is introduced in more and more countries. The first one to do so was New Zealand in 1990. In Norway, the authorities continue to pursue a fixed exchange rate policy for a while, but in 2001, the Government introduces an inflation target in Norway.4 In the initial period of inflation targeting, central banks are concerned with building confidence in their targets. Many central banks practice inflation targeting fairly rigidly and seek to guide inflation back to target relatively quickly after a deviation. Once confidence is established that inflation will remain low and stable over time, central banks can give more weight to other considerations, such as promoting high and stable employment. Inflation targeting gradually becomes more flexible. Norway’s experience with inflation targeting is positive. In spite of a global financial crisis and large swings in oil prices, inflation remains low. Monetary policy is used actively to stabilise the economy. In the revised monetary policy mandate adopted in 2018, it is specified that monetary policy shall be forward looking and flexible. But monetary policy does not operate in a vacuum. An appropriate division of roles in economic policy is decisive. 3.