We also give emphasis to predictability and transparency. Normally, the interest rate is set with a view to achieving inflation of 2½ per cent at the two-year horizon. This time horizon usually provides a reasonable balance between stabilising inflation on the one hand and smoothing fluctuations in output and employment on the other. 1  See Akram, Farooq Q. (2003): “Reell likevektsvalutakurs for Norge” (Real equilibrium exchange rate for Norway), in Norsk Økonomisk Tidsskrift 118, pp. 89-112. 2  BIS Review 25/2004  If demand for goods and services is high and there is a shortage of labour, there will normally be prospects of higher inflation. When the interest rate is raised, demand is dampened and inflation is kept in check. If demand is low and unemployment rises, there will be prospects of lower inflation. The interest rate will then be lowered. The inflation target thus represents a framework, not an obstacle, for monetary policy to contribute to stability in output and employment. Section 1 of the Regulation on Monetary Policy states that in addition to sustaining the level of inflation at approximately 2½ per cent over time, monetary policy shall also contribute to stable developments in output and employment. The mandate therefore establishes a flexible inflation target for monetary policy where variations in output and employment are also given emphasis.
Consumers may attach more importance instead to the inherent qualities of goods and services and to their price in relation to these qualities. That would more likely lead to stronger competition and increased downward pressure on prices and profit margins. The new technology would then turn out to benefit consumers rather than shareholders. Diagram 5:  Real return on equity 1900-98 1000 100 Trend 7% per year  10 1 0,1 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Sources: Frennberg & Hansson, Affärsvärlden and Riksbank calculations  BIS Review 90/2001  5  Returning to the comparison with the United States at the turn of the nineteenth century, we find that the profits of electricity producers were not higher than normal. The increased competition pushed prices and profit margins down. All this means that there are many reasons for supposing that even in the future the long-term real annual return on equity will probably continue to be in the vicinity of the historical trend of around 7 per cent, though it is liable to vary. That has been the case in Sweden throughout the twentieth century (Diagram 5) and in the United States for virtually two hundred years. Major technological breakthroughs occurred in this period. This long historical perspective shows that over considerable periods the real return on equity has been fairly constant. Conclusion In conclusion it can be said that my argument basically points to a positive finding.