Despite the weakened krona, the decrease in exports was extremely severe. It is natural to ask why. One explanation is that a large part of the decline in world trade affected investment goods and durable consumer goods such as cars. The purchase of these goods could easily be postponed when the crisis broke out. Such product groups represent an important part of Sweden’s exports. In could thus be said that Sweden was impacted particularly severely due to the composition of its exports. As I mentioned in my introduction, Sweden is a small, open economy that is highly dependent on exports. During 2009, GDP fell by over 5 per cent, the sharpest decline since the Second World War. Even if the krona was heavily weakened, this was not enough to prevent a major fall in exports. On the other hand, there are many indications that the weakening of the krona contributed strongly towards preventing inflation from becoming excessively low. Unlike abroad, where inflation became negative, inflation in Sweden remained around the target even during the most acute phase of the crisis (see Slide 6). Note that inflation in Sweden here disregards changes in mortgage interest expenditure – it is measured using the CPIF. This approach corresponds better with the way that inflation is measured abroad. 2 Developments in Sweden during the financial crisis differ in several regards from the crisis we experienced during the 1990s, when major problems were present in the Swedish economy before the crisis erupted.
However, the discussion in recent years has mainly focused on another reason why the central bank might want to keep an eye on asset price trends, and this is that the collapse of inflated asset markets can have a serious impact on the real economy and in some cases eventually threaten the stability of the financial system. Apart from protecting monetary value, which is perhaps their best-known function, it is also the task of central banks to promote financial stability, whether directly or indirectly. This is even suggested by the Swedish legislation, which lays down that the Riksbank shall seek to “promote a secure and effective payment system”. Dramatic events following the collapse of asset markets are usually assumed to be triggered by the consequences in the credit market and company balance sheets. When asset prices rise more than economic fundamentals justify, a fall in prices is inevitable sooner or later. Such an adjustment can be very costly if financial institutions have widely accepted assets as collateral for loans during the period of rising asset prices. When there is a sudden sharp fall in prices, the value of the collateral diminishes. In such a process falling asset prices can cause losses to banks and other financial intermediaries and, if the worst comes to the worst, a full-scale financial crisis. These problems can, moreover, be exacerbated by exchange rate fluctuations.