A tolerance interval of 1 percentage point on either side of the target was included mainly to make it clear that deviations would probably occur but also that they should be limited. The target was tied to the consumer price index, the measure of inflation that was most familiar and reliable, besides being published regularly. There is a great deal to say about this — the choice of the target’s level and the choice of index — in the light of our experience and the academic literature that accumulated in the 1990s. I shall have to be brief, however, because otherwise there will be no time for the more practical issues about our procedures, which is today’s theme. So here are three short comments: •  The appropriate level of inflation is one debatable point. There are arguments for a somewhat higher level as well as a somewhat lower. With our present knowledge, this is ultimately a matter of judgement and so far there has been nothing to persuade me that there are any grounds at present for changing our target. As I see it, the most important thing is to set up a distinct target so that a given rate of inflation is anchored among all economic agents, be they households or firms, employers or employees. In this we have been very successful. •  The choice of an index is a complicated matter.
Starting from appraisals of global economic  The inflation puzzle International developments ■  ■  ■  etc  BIS Review 24/2001  Development of GDP Interest rates and exchange rates Oil prices  Swedish economy ■  The krona  ■ ■  ■  etc  Development of GDP Productivity Utilisation of resources Wages  Other ■  Inflation expectations  Inflation ■  Taxes and subsidies  3  developments, various international prices, for oil for example, the exchange rate, interest rates and what is happening in the domestic economy, we estimate a picture of economic activity and resource utilisation in Sweden. Normally it is resource utilisation that is crucial for inflation. To this we add an assessment of inflation expectations as well as estimates of factors with effects that may be more or less transitory, such as changes in interest rates and taxes. The combined result is a forecast of inflation. The large model is made up of a number of relationships, The equations for calculating exports are one example. Swedish exports are estimated as a function of, for example, global economic developments and the path of the krona’s exchange rate or some other measure of relative prices. But as some important relationships are not particularly stable, we have to make judgements on the basis of other experiences. Sometimes, moreover, there are grounds for supplementing a model-based calculation with more specific information. There may be indications that investment activity, for example, will be higher than historical relationships indicate.