Mr. Bäckström discusses monetary policy and unemployment in Sweden Speech by the Governor of the Bank of Sweden, Mr. Urban Bäckström, before the Swedish Economics Association on 6/3/97. First a word of thanks for the invitation to this evening’s discussion. This is the third year in succession that your Association’s agenda has featured monetary policy. My first introductory talk, in 1995, was about the importance of low inflation and the background to and implications of focusing on price stability. Last year I took up matters to do with monetary policy’s construction and effects, as well as the considerations behind the monetary policy decisions in recent years. This evening I shall be elaborating on those discussions and then deal with monetary policy in the context of Sweden’s high unemployment. Economic developments in Sweden Following the deep recession in the Swedish economy in the early 1990s, we are now in the fourth year of economic expansion. Since 1994 production’s annual growth rate has averaged 2.8 per cent, which is considerably above the trend to which we have been accustomed in recent decades. In 1994 and 1995 the GDP growth rate averaged as much as 3.5 per cent. This increase was concentrated on the internationally oriented sector and industrial activity registered the fastest upswing in a long time. This led to capacity problems despite relatively high investment growth. The strong expansion was therefore not sustainable. Moreover, the credibility of economic policy was impaired by weak central government finance and an unfavourable history of inflation.
As the structures and institutions in the Swedish labour market resemble those in the rest of Western Europe in many respects, it is reasonable to suppose that the same forces have been at work in our country but that their impact and importance were concealed for a long time by an expansionary economic policy that was ultimately unsustainable. High and more or less permanent unemployment, or high equilibrium unemployment, is a sign that the labour market is functioning poorly. These problems are rooted in turn in wage developments because it is price formation which is the central market mechanism. Conclusion The best way in which monetary policy can contribute to an economy that functions better economy with employment and growth is by keeping inflation low and stable. 8  Björklund, A., Edin, P-A., Holmlund B. & Wadensjö, E. (1996), Arbetsmarknaden (The Labour Market), SNS förlag, Stockholm. 9 Examples of an explanation of persistence theories are given in Lindbeck (1993), Unemployment and Macroeconomics, MIT Press, and in Snower (1994), "Commentary: The Extent of High Unemployment in OECD Countries" in Reducing Unemployment: Current Issues and Policy Options, Federal Reserve Bank of Kansas City. BIS Review 38/1997  - 11 -  The economy can then expand along its long-term growth trend. If this path, which is determined by structural factors, permits a rapid increase in output, growth will then be high. If potential output rises slowly, on the other hand, economic growth will be weak even if monetary policy were to be very expansionary.