The Riksbank’s objectives and means have been influenced by developments in society Figure 1 illustrates inflation in Sweden over the past 140 years and the exchange rate regimes we have had during this period. Something that becomes clear is that even if we have now become used to a flexible exchange rate, over a long period of time a fixed exchange rate has been much more common. However, from time to time socioeconomic developments in general have led to the prevailing monetary policy regime being reconsidered. 1 As you know, Sweden has not introduced the euro as currency, but on the other hand we were part of a Scandinavian currency union between 1873 and 1924. 2 This began a period with different varieties of fixed exchange rate, which – with the exception of the First World War and a brief period in the 1930s – came to last until 1992. During 1931–1937 the Riksbank worked with a price stability target, for some years this was also combined with a fixed exchange rate. It would take another 50 years until we introduced a price stability target again. 1  This also applies to the central bank’s mandate in a broader sense. See Georgsson, M, Vredin, A. and Åsberg-Sommar, P., “The modern central bank’s mandate and the discussion following the financial crisis” Economic Review 2015:1, Sveriges Riksbank. 2  This cooperation largely came to a halt in connection with the outbreak of the First World War ten years earlier.
The real failure of economists was that too much energy was devoted to forecasting – to trying to assess whether economies would turn down – and not enough was spent analysing the question of “well, what if they do; how bad could it be?” And as a result, the financial system was unprepared. It was not a failure of economics. It was a failure to apply economics to the right question. Without economics, the answers to “how bad could it be?” relied all too often on recent historical precedent; on this time being different. 11  And, even more dangerously, they relied on market measures of risk; indicators that – as recent work at here the LSE Systemic Risk Centre shows – often point to risks being at their lowest when risks are actually at their highest. 12  The Financial Policy Committee’s mandate is to break free of the shackles of forecasting, to free us from trying to predict if the economy will turn down, and to apply economic analysis to the question of how bad it could be if it did. 13  The re-focussing of economic research since the crisis has supported us in that. It has  established, for example, how far: 14  Recessions that follow credit booms are typically deeper and longer-lasting than others ; 15  Over-indebted borrowers contract aggregate demand as they deleverage ;  While they have high levels of debt, households are vulnerable to the unexpected.