When the economy is in steady state, it is in a long-run equilibrium where the effects of all shocks to which the economy has been exposed have worn off, and the expectations of inflation and other variables are fulfilled. It is often called the (long-run) natural rate of unemployment.16 It can be seen as the forecast for unemployment in the very long run (under the assumption that inflation expectations are realised). Long-run sustainable unemployment, unlike long-run average inflation, is independent of monetary policy. It is determined by structural conditions in the economy, such as how the labour market and wage-setting function, what the replacement ratio of unemployment insurance is, by the systems for sick pay and income tax and by the demographic  12  An estimate using the Riksbank’s model, Ramses, in accordance with the effects of various repo-rate paths as described in Svensson (2010), leads to roughly the same estimate of 1.3 percentage points. 13  A 95-per cent confidence interval for the point estimate 1.3(=1/0.75) percentage points gives an interval between 1/1.1= 0.9 percentage points and 1/0.4=2.5 percentage points, corresponding to a confidence interval for the estimate 65,000 unemployed between 45,000 and 125,000. 14  2.6 per cent of 170 per cent is about 4 per cent. 15  Moreover, according to one of Qvigstad’s (2005) criteria for a good policy rate path – applied to unemployment – inflation should normally overshoot the target when unemployment exceeds its long-run sustainable rate.
We can thus say that the cost in terms of unemployment of the fact that the average rate of inflation has fallen below the target is approximately 38,000 unemployed.11 As explained in my paper (Svensson 2012d) the sloping long-run Phillips curve is arguably relevant only when the average rate of inflation deviates moderately from inflation expectations and the target (for example deviations less than plus/minus one percentage point). In the case of larger average deviations it is likely that inflation expectations will eventually adjust. Inflation closer to the target would mean 65,000 fewer unemployed An increase in unemployment of about 38,000 people is the average cost for the tight monetary policy conducted during the period from 1997 to the end of 2011. So what is the cost of the tight policy being conducted now? How much lower would unemployment be now if a more expansionary monetary policy had been conducted during the past two years, as consistently advocated by my Executive Board colleague Karolina Ekholm and myself since summer 2010? Let us assume that inflation would have been one percentage point higher and thus been closer to the target now. According to my working paper (2012d), the slope of the long-run Phillips curve, 0.75, is not only relevant in the long run, but also a year or so ahead. A rate of  10  See Svensson (2012d). A 95 per cent confidence interval for the slope is given by 0.75 ± 0.35, that is an interval between 0.4 and 1.1.