Developments beyond the forecast horizon The uncertainty in the forecasts increases the further ahead they look, but despite this it can be interesting to look beyond the two-year forecast horizon in the main scenario. Economic developments during the past decade have been characterised by considerable free resources following the crisis at the end of the 1990s. That is not the case today, and will be even less the case in two years’ time, if the economic upturn continues as expected. This changes the focus of economic policy. A decisive factor for economic growth will be the development of production capacity, as I have mentioned earlier. It is production capacity that governs the development in demand that is compatible with price stability. Here there are some worrying tendencies, which I have touched upon earlier. The labour supply in Sweden risks developing less favourably beyond the forecast horizon as a result of demographical changes. Shorter working hours would have the same effect. On the other hand, measures may be taken to increase the supply of labour and thereby affect developments in the opposite direction. This effect could be obtained by, for instance, lower absence due to sickness. It is clear that the way the labour market functions will play a decisive role for economic growth both in the coming two years and beyond the forecast horizon. An important issue for Sweden in the near future is whether we shall take part in the third stage of EMU.
This helps to ensure that the central bank is consistent over time. Monetary policy in recent years Has monetary policy been successful? Has it contributed to satisfying the preconditions for a stable krone exchange rate? Before I attempt to answer these questions, I will briefly review the actual conduct of monetary policy and the decision-making basis. The period between December 1992, when the fixed exchange rate regime was formally abandoned, and 1996 was characterised by balanced growth and a stable krone exchange rate. However, in 1996 the economy began to show signs of overheating. Coupled with an increase in oil prices, this contributed to appreciation pressures on the krone. Interest rates were kept at a low level to counter  BIS Review 7/2001  5  appreciation pressures, and fiscal policy was not sufficiently tight to curb pressures in the economy. Developments since the beginning of 1997 show that the exchange rate is no longer suitable as a short-term operational objective of monetary policy. Norges Bank cannot fine-tune the exchange rate. As mentioned, Norges Bank therefore places emphasis on satisfying the fundamental preconditions for stability in the krone exchange rate over time in its conduct of monetary policy. Instability increased further in 1998. In addition to domestic problems of overheating, which translated into strong cost inflation, 1998 was marked by financial crises in Asia, Russia and Brazil, falling commodity prices and general unrest in international financial markets.