BIS Review 56/1997  -4-  Figure 2  M o n e y M a r k e t Ag e n ts’ I n fla t io n E x p e c t a t io n s P e r ce n t 5  5  O c t . ’9 4  4  4 3  O c t . ’9 5 M a y ’9 6  CPI  3  N o v . ’9 ’9 6 2  2  F e b . ’9 ’9 7 1  1  0  0 -1  -1 94  95  96  97  98  99  00  01  S o u rce s : S ta tis tics S w e d e n a n d P ro s pe ra R e s e a rch The way in which the instrumental interest rates are changed also has to do with credibility and tactics. If complete credibility in monetary policy and a low-inflation regime have not been achieved , it will naturally influence the pace with which interest rates are lowered or raised. In situations of this kind, the result may be that the central bank has its instrumental rates set at either a too high or a too low level compared with what would have been warranted in an environment of high credibility. Developments during 1996 can illustrate the effects on policy of both uncertainty and insufficient credibility.
The Exchange Rate In small, open economies, the exchange rate has an important influence on inflation. At the same time, it is a variable that has fluctuated considerably in recent years for reasons which have not always been easy to foresee and interpret. How changes in the exchange rate should be handled in practical policy depends above all on how lasting a change in the exchange rate is judged to be. More enduring changes that have an effect on inflation forecasts obviously have to be taken into account In order to decide on the duration and what is a reasonable reaction, one normally has to know what brought about the change. Several different cases can be discerned: A nominal change in the exchange rate can be a result of a change in the real equilibrium exchange rate. This case is in principle simple to manage since it normally does not lead to a changed picture of inflation and thereby does not occasion any specific policy measures. Changes in the real equilibrium exchange rate have not been an especially common reason for changes in the exchange rate in recent years, at any rate since the krona fell in connection with the changeover to a flexible exchange rate in 1992. A change in the nominal exchange rate may also have to do with a change in the long-term view of the steadfastness in economic policy, or what is termed credibility.