Fiscal policy and monetary policy’s manoeuvrability Let me begin with fiscal policy. Since the dramatic deterioration of government finance in the early 1990s there has been a remarkable recovery. From a deficit equivalent to over 12 per cent of GDP in 1993 the Government now counts on a deficit of 2 per cent for 1997. This consolidation, besides attracting praise from the European Union and international organisations, has earned the confidence of our creditors; since 1995 the interest rate differential between Swedish and German treasury bonds has narrowed from 3.5 to little more than 1 percentage point. Even with the SEK 16 billion for expansionary measures in fiscal 1998 that the Government proposed in the Spring Economic Bill, the Swedish budget trend looks favourable in a European context. Notwithstanding these successes, there is reason to comment briefly on how fiscal policy influences the conditions for monetary policy and thereby the future development of interest rates. This influence acts in two ways. Firstly, fiscal policy is an important consideration for monetary policy in that it affects the demand situation in the economy. An illustration of this is provided, for example, by the recent years’ changes in household disposable income. Although household wage income rose strongly from 1994 to 1997, the sector’s disposable income hardly changed. Household income has been held back by increased taxes and decreased transfers; but for the negative effects of changes in public systems, the annual level of household income would have been 3 to 4 per cent higher.
The prolonged period of unusually low inflation during past decades allowed central banks to conduct extremely accommodative monetary policies for a very long time. This has contributed to a significant buildup of global financial vulnerabilities, including stretched valuations of risk assets, high house prices, and record high private and public debt.1  •  For small open economies, especially those from emerging markets, the challenge is to maintain stability in the face of more volatile capital flows, large swings in exchange rates, and tighter global financial conditions. The steep appreciation of the US dollar poses significant risks, particularly for those countries with high external vulnerability. Many have had to follow the aggressive tightening of policy by the Fed. •  That said, the overall repercussions of advanced economy policy tightening on global financial markets have--thus far--been remarkably orderly. There have been no major dislocations in emerging market capital flows and there has been clear differentiation based on country-specific fundamentals. Asian economies overall have exhibited resilience. Capital outflows have been less  1 In Q1/2022, global house prices, in nominal terms, are rising at a rate of 10.2%, in real terms (once adjusted for inflation) is closer to  3.3%. The rate of real house price growth has now declined for two consecutive quarters (Figure 2).