On the contrary, domestic demand has been the most important driving force behind 3 For a more detailed review, see the article “How do low and negative interest rates affect banks’ profitability?”  in the Monetary Policy Report April 2016. The Riksbank's conclusions in this field are shared by Turk (2016). 3 [20]  the improved economic activity in Sweden. In addition, sentiment in the household and corporate sectors is good, according to various confidence indicators (see Figure 5). It is also worth noting in this context that there is a fairly intensive international discussion on whether negative policy rates should be included in the central banks’ normal arsenal going forward, as a weapon that could be used if special needs arise. One advocate of this is Ben Bernanke, former chairman of the Federal Reserve. 4 He argues that negative policy rates have many advantages in relation to raising the inflation target, which is also discussed as a means of creating greater room for manoeuvre in future recessions. It is worth noting that this international discussion exists, as a contrast to the picture often painted in the Swedish debate – that negative policy rates are an isolated and strange invention of the Riksbank and a few other central banks. Negative policy rate wrong policy in current economic situation? The second form of criticism, as I mentioned earlier, is that a negative interest rate is the wrong policy in the current economic situation.
The Riksbank therefore assessed it was necessary to conduct a very expansionary policy to safeguard confidence in the inflation target. Good reasons to preserve confidence in the inflation target There are good reasons for safeguarding this confidence. When economic agents have a collective picture of how prices will develop in the future, it becomes easier to plan for the long term. The inflation target contributes to coordinating expectations in the economy and thereby lays the foundations for smoothly-functioning price-setting and wage formation. As I see it, the good wage formation system that we have today is perhaps the greatest achievement of inflation targeting. During the 1970s and 1980s, wage formation was a constant source of disruption in the Swedish economy. It caused considerable uncertainty for many companies. One was forced to manage the cost problem and poorer competitiveness through recurring devaluations of the krona. The situation was generally untenable and eventually led to an extensive economic crisis at the beginning of the 1990s. An important insight here is that a credible inflation target can give rise to a beneficial self-reinforcing cycle. If expectations are in line with the inflation target, and if pricesetting and wage formation adapt to these expectations, actual price developments will then also become consistent with the inflation target. On the other hand, if expectations were to become stuck at a level that is too low, one instead has a negative self-reinforcing effect, which means that the central bank has to struggle much harder to attain the inflation target.