Thus, there are similarities between the strategies of these central banks and inflation targeting regimes. If the differences are greater rhetorically than in practice, it is therefore difficult to establish that one of the arrangements has performed better or worse than the others. Diagram 2 presents the variations in growth and inflation for a number of industrialised countries in two periods. One is the years from 1970 to 1990, when central bank policy – except in Germany and Switzerland – tended to concentrate excessively on stabilising employment and demand instead of aiming to maintain price stability in the medium term. In a majority of these countries the transition to a stability-oriented monetary policy had at least not been completed. By the time of the other period, 1995–2000, in a number of countries the transition to price stability had been successfully completed. The choice of periods and countries as well as methods is, of course, debatable but in all the countries it looks as though the situation had become considerably more stable in the more recent period compared with the earlier. That conclusion applies to Sweden, where much hard work has been devoted to making the new regime credible. What I have in mind is, course, the ambitious consolidation of the government finances and the Riksbank’s own efforts to generate confidence in the new and initially fragile regime with an explicit inflation target. The Swedish economy appears to have become more stable with the new regime.
The point I want to make is that our monetary policy strategy provides for such a contingency. Forecasting is difficult So far I have been discussing advantages of the Riksbank’s current monetary policy arrangements and the drawbacks alternative strategies may have. In doing so I hope I have indicated that the alternatives also have some advantages, too. But I still consider that the advantages with the Riksbank’s way of conducting monetary policy outweigh the disadvantages. But something should also be said about what is perhaps the current regime’s greatest drawback, namely the difficulty in forecasting future inflation, not least in such a comparatively distant perspective as one to two years ahead. Completely reliable forecasts of future inflation presuppose success in two respects. One is managing to predict how shocks in the current situation will spread successively through the economy and affect the future rate of inflation. The other is managing to predict the shocks that subsequently occur in the forecast period and generate a future increase or decrease in the rate of inflation. While the first task is certainly difficult but maybe not completely out of the question, given that the course of events stays reasonably close to historical patterns, the second is virtually impossible. In other words, forecasts can err and we must bear that in mind. So I want to make it particularly clear that even though forecasting errors occur, I still consider that most things indicate that our present forecast-based inflation targeting regime functions satisfactorily.