The road will no doubt be long and arduous. Chart: Yields on 10-year government bonds But the situation across countries differs considerably and is reflected in wide yield spreads. Investors now demand substantial premiums for investing in less safe assets. Capital is seeking safe havens, even though real returns on presumably risk-free investments are low or negative. Wide yield spreads may persist for a period – it takes time for countries to restore competitiveness and build up stronger balances, particularly when growth is also weak in other regions. Substantial economic imbalances in Japan and the US also need to be redressed. Turbulence and bad times in Europe are now dampening activity in these countries and in emerging economies. This situation has led to the emergence of new forms of monetary policy in many parts of the world. Interest rates have been low – close to zero – for a long period. The Federal Reserve has indicated that the federal funds rate will most likely be exceptionally low at least until mid-2015. In the event, the US key rate will have been close to zero for almost seven years. As key rates cannot be lowered further, several central banks have decided to apply other methods. The methods fall into two main types: The first method relates to communication. Statements concerning the future central bank key rate are being employed as a new monetary policy tool.
All this had a marked downward effect on domestic demand. The drop in output—almost 6 per cent in the course of three years—meant in turn that government finances worsened dramatically. From a surplus at 4.2 per cent of GDP in 1990, the budget balance swung to a deficit of 12.3 per cent in 1993. In this period, moreover, registered unemployment shot up from 1.7 to 8.2 per cent. In a way, the economic crisis in the early 1990s can be said to have been generated by political decisions. The combination of a stabilisation policy realignment with some structural reforms did play a part in the course of the crisis. But it should also be underscored that such measures were broadly essential. The problem was not so much the measures that were implemented when an inflationary bubble had already developed as the fact that policy had not been realigned earlier. In recent years, economic developments in Sweden have been favourable. Growth has been stronger than in the high phase in the late 1980s and it has proved possible to combine good growth with low inflation. A couple of years after the realignment of economic policy, inflation had fallen BIS Review 47/1998  -2sharply to around 3 per cent. Moreover, the reduction of current inflation has been accompanied by a downward revision of inflation expectations. Today, neither households, firms nor financial market agents perceive any serious threat from inflation in the coming five years.