However, one disadvantage of using different inflation measures in different situations is that it can create uncertainty as to how the inflation measure is defined, even when you try to be clear as to why a particular measure has been emphasised at a particular time. The Riksbank has some experiences of this, which have given us reason to consider ways of reducing the need for different underlying inflation measures. One possibility could be to make forecasts covering longer periods. For the Riksbank the need to emphasise alternative measures of inflation has declined since we, a while back, started to  2  A description of the Riksbank’s goal and strategy for monetary policy can be found in the document “Monetary Policy in Sweden”, which can be downloaded from the Riksbank’s website www.riksbank.com, or ordered as a booklet. BIS Review 111/2006  3  publish forecasts of developments three years ahead instead of two years ahead. With a longer forecast horizon it is possible to illustrate more clearly when various shocks have effects that are temporary and how they dissipate over time without having any lasting impact on inflation. This makes it easier to explain whether the interest rate needs to be changed or not 3 . The target horizon and real stability When the inflation target was announced in January 1993, the Riksbank also formulated a tolerated deviation interval of plus/minus 1 percentage point.
The idea behind the fixed exchange rate policy was to ensure that inflation in Sweden would be in line with our most important trading partners’ inflation rates and that the fixed exchange rate would function as a nominal anchor. Instead, price and wage developments repeatedly came on a collision course with the fixed exchange rate and Sweden suffered cost crises. To rectify this situation, the krona was  BIS Review 111/2006  1  devalued a total of five times during a period of seven years. However, the trend increase in domestic prices and wages continued to rise, so the fundamental problem was still there in the background. The result was modest economic growth, poor productivity growth and more or less stagnant real wages. This performance was markedly weak both compared with earlier periods and in relation to other countries. During the crisis years at the beginning of the 1990s the situation deteriorated even further. Unemployment increased fourfold in the course of a few years and the central government finances deteriorated dramatically. Long-term interest rates rose and the interest rate differential vis-àvis Germany, for example, occasionally came to several percentage points. The fixed exchange rate lost credibility and had to finally be abandoned in November 1992, following large currency outflows and extreme interest rate hikes in an attempt to defend the krona. The nominal anchor that was to hold down inflation and inflation expectations in the economy had loosened. To pin it down again and bring the Swedish economy onto a better track required drastic measures.