It is therefore important to publish forecasts for inflation and the real economy, which the Riksbank does. We will never live in a world where it is possible to fully predict the future. Moreover, our knowledge of how the transmission mechanism works, that is, how an interest rate change works its way through the economy, is far from perfect. But given the available information and with the knowledge available we shall make the best possible forecasts and it shall be possible to evaluate our forecasts. When inflation deviates from the target it shall be possible to understand why this happened and to assess the deliberations that were held. To publish a forecast for the repo rate on top of all this, which is something few central banks do, makes it easier for us to find the most reasonable balance between attaining the inflation target and stabilising the real economy. It also helps us explain our policy. We also do this by presenting a number of alternative scenarios for the economy and showing what consequences these would have for monetary policy. Popular and unpopular interest rate decisions In the long run it is the actual "delivery” of low and stable inflation that creates confidence in long-term stable prices. But the economy can be subjected to unforeseen shocks that affect inflation and monetary policy cannot have the precision required to constantly maintain inflation at the target level. Deviations from the inflation target have happened before and will happen again. The important thing is that they are temporary.
According to Friedman, it is therefore best for monetary policy to create the right conditions for a stable price level and to focus on the variables that a central bank can control, such as the money supply. In the 1970s and 1980s a number of countries applied a monetary policy regime that was based on steering the money supply. However, research has shown that there is no stable relationship between the money supply and inflation. The rapid financial developments and the use of new, alternative methods of payment have contributed to the money supply not functioning well as a target variable for monetary policy in our present society. Nor is the rate of circulation of money constant; it can vary substantially. It is therefore more natural to focus on trying to directly steer inflation and allow the money supply to remain one indicator among many. The past few decades’ research has pointed to the importance of inflation expectations. Although there is a relationship in the short run between unemployment and inflation, the central bank cannot make use of this in the long run, as companies and individuals will realise what policy is being conducted and adapt their expectations accordingly. For example, wage-earners may demand higher wages as compensation for coming inflation. This will in turn have a negative effect on employment. Monetary policy thus cannot have a lasting influence on real economic variables.