Kristina Persson: Monetary policy and labour supply Speech by Ms Kristina Persson, Deputy Governor of Sveriges Riksbank, at a meeting arranged by the municipality of Örebro, Örebro castle, 2 April 2003. *  *  *  Thank you for the invitation to participate in this conference and for the opportunity to inform you about current monetary policy and the Riksbank’s objectives. I shall also take up one of the major challenges facing the Swedish economy over the coming years, namely labour supply and what consequences this may have for future growth and welfare in Sweden. Monetary policy focuses on inflation The monetary policy objectives are clearly stated in the Sveriges Riksbank Act - to maintain price stability and to promote a safe and efficient payment system. The Riksbank has specified the first of these objectives in an inflation target. The annual rate of change in consumer prices shall be 2 per cent, with a tolerated deviation interval of ± 1 percentage point. Monetary policy is normally directed at fulfilling this target one to two years ahead. To achieve our objective, we therefore make forecasts of price trends. If the forecasts indicate that inflation will be higher than the target level one to two years ahead, monetary policy must normally be tightened and the interest rate raised. The reverse applies if the forecast shows a lower inflation rate than the target level.
The stronger the increase in demand in relation to potential production, the greater the risk of prices and wage rising too fast, and vice versa. We must therefore analyse the entire economic outlook, despite the fact that inflation is our target variable. However, the Riksbank cannot affect potential production, i.e. how quickly the economy can grow without causing inflation. This is what structural policy can do. Structural reforms can promote both investments and labour supply and thereby have a favourable effect on the long-term growth capacity of the economy. A good structural policy can, for instance, contribute to a larger number of persons in various age groups choosing to work instead of remaining outside of the labour force. By improving the conditions for wage formation and price-setting, structural reforms can also contribute to increasing the economy’s capacity to adapt to different types of shock. Structural policy can thus be seen as a complement to monetary policy. The better the long-term growth capacity of the economy, the more  1  See the monetary policy memorandum “The Riksbank’s inflation target - clarification and assessment”, 4 February 1999, Reference no. 1999-00351 DIR. BIS Review 17/2003  1  quickly the actual growth rate can be without inflationary pressure arising, which would mean that the Riksbank had to react by raising the repo rate. Structural reforms are thus important from a welfare perspective. A high growth rate in the long term increases the possibility to pay high wages, extend welfare or invest more in infrastructure and education.