It is accordingly conceivable that the Swedish economy will move into a process with accelerating productivity growth but let us wait until that happens before incorporating it in our expectations and policy decisions. Our economy is developing favourably enough as it is. A growth process driven by rising investment and productivity can result in good circles. To some extent, that can be said to have been the case in recent years. It accordingly helps to explain the favourable economic developments in Sweden. Another cause lies in the various deregulations that have been implemented. 1  BIS Review 87/2000  Inflation this year improved by deregulation and competition Thus, it is other positive supply side effects that have helped to achieve the rapid output growth without generating inflationary impulses. The effects have come from the deregulation of electricity and telecom markets, as well as from the EU’s agricultural reform. Meanwhile, the temporarily lower rate of inflation has meant that real wage growth has exceeded expectations and thereby acted as a general demand stimulus. On the whole, however, the effects are of the one-off kind that lower the price level and stimulate demand for just a limited period. But if these effects have a gradual impact on different segments of the economy, their overall impact on inflation may be spread over many years. Another explanation for the favourable overall price trend is the generally stronger competition.
Fourth, on asset bubbles and the linked exchange rate system: the monetary policy objective of Hong Kong is exchange rate stability, rather than to target asset prices or inflation. Asset bubbles are not unique to economies with fixed exchange rates. Economies with floating exchange rates experience similar problems. In any case, it is difficult to tell ex ante whether there is an asset bubble. On the other hand, most research studies find that monetary policy is too imprecise and blunt to be used as a tool for targeting asset prices. Fifth, on the Hong Kong dollar being undervalued: there is no evidence. Recent empirical research by the HKMA and the IMF show that there is no evidence of currency misalignment for the Hong Kong dollar at present. Given the flexible and adaptive nature of the Hong Kong economy, wages, prices and other economic variables would adjust so that any misalignment in the real effective exchange rate would be corrected. Even a flexible exchange rate is not immune to sustained currency misalignment. Exchange rate  BIS Review 139/2007  5  movements are affected not only by economic fundamentals but also by market dynamics. A flexible exchange rate is arguably more prone to currency misalignment, particularly for small and open economies which are more vulnerable to changes in capital flows. Sixth, on widening the exchange rate band: the simple answer is no. It would only serve to undermine the credibility of the linked exchange rate system and invite speculation on the likelihood of further band-widening.