Barbro Wickman-Parak: Inflation targeting and the financial crisis Speech by Ms Barbro Wickman-Parak, Deputy Governor of the Sveriges Riksbank, at LO (the Swedish Trade Union Confederation), Stockholm, 9 January 2009. *  *  *  It is usual at the beginning of a new year to look back over the past year. If we look back at economic developments during 2008, it would be an understatement to say that it was an eventful year. First we had soaring oil and other commodity prices, combined with rising cost pressures and ever declining economic activity abroad. At this point concern was expressed in the international debate that the economies could suffer stagflation, that is, a combination of rising inflation and an economic downturn. The anxiety about stagflation soon faded. When the crisis in the financial markets suddenly intensified in the wake of the Lehman Brothers bankruptcy and economic activity deteriorated substantially in most parts of the world, a new theme for the debate arose; deflation. It is no surprise that situations like the present one cause people to wonder whether the monetary policy system is really strong enough to withstand these conditions, too. Let me first say that it is important to discuss this; new experiences and knowledge change the conditions for monetary policy. These things are not carved in stone!
Clarity and openness were guiding principles for the inflation-targeting regime right from the start, and I believe that this has played an important part in building up confidence in the inflation target. This culture has therefore continued to permeate the Riksbank’s activities. It is also important so that the Riksdag, which is our principal, can evaluate the Bank and require accountability from us. This motive became particularly important when the new wording of the Sveriges Riksbank Act gave the Riksbank an Executive Board with an independent position in 1999. Why 2 per cent? The new wording of the Sveriges Riksbank Act applying from 1999 changed the objective for the Riksbank’s activities to maintaining price stability. The previous Act contained a more general formulation that the Riksbank was responsible for “foreign exchange and credit policies”. When the new wording was produced, it was pointed out in the preliminary work that in principle the Act could be very detailed with regard to the target for inflation and so on. But the legislators judged that this type of precision would not be sufficiently flexible and allow the Riksbank enough scope to adjust the target to different circumstances. This raises the question of what price stability actually is and of whether 2 per cent inflation is the best target for the Riksbank. If one turns to academic literature on this subject, one will not find any clear answers. Everyone agrees that high inflation is detrimental to the economy.