In an attempt to maintain growth in the traditional industries, economic policy responded with a series of devaluations. Each devaluation was invariably said to be the final one but the cycle of rising wage  BIS Review 129/1999  2  costs and a devaluation was still repeated again and again. The aim of compensating for the lack of change in Sweden’s corporate sector, which stemmed from the 1960s, simply did not work. If anything, the devaluations meant that the problems persisted and were accentuated. With the lack of investment in new products and the dependence on an increasingly outmoded structure of production, the entire nation’s material standard had to be adjusted. For many years, growth in Sweden was weaker than in the world around us. This example shows how a “new economy” at that time posed problems for the Swedish economy rather than opportunities. The lack of change, because wage formation did not function properly, resulted in an economy that was weaker and more susceptible to inflation. The period clearly illustrates how globalisation, increased competition and new technology can lead to lower growth and higher inflation if changes are not made sufficiently quickly. If the economy is under pressure from strong competition as well as poorly functioning wage formation, economic renewal may lag behind. It is therefore gratifying that the labour market organisations seem to be increasingly in favour of the inflation target policy.
Considering the historic dimensions of the money market crisis, the three-month Libor managed to return remarkably quickly to the target range – just one day after the two interest rate reductions of 6 and 20 November the Libor had already moved into the new range in both cases. The turmoil in the money market prompted the SNB to conduct money market operations to an extent that had never before been witnessed. There were days when up to five auctions were held. The volume of the operations varied considerably. On record days, we carried out operations worth over CHF 100 billion. The reason for these sizeable operations can be found in our interest rate management – we first inject large amounts of liquidity into the market and later absorb it again. Until just a few weeks ago, the liquidity actually remaining in the system was not considerably higher than before the crisis. It was not until the SNB adopted a policy of very low money market rates that the sight deposit balances increased markedly. The low interest rate level means that the opportunity costs for banks to hold  2  BIS Review 157/2008  liquidity are lower, thus prompting them to hold more money in sight deposits. The extent of the money market operations also has a major impact on the size of the SNB’s balance sheet. Before the crisis, approximately CHF 20 billion of the balance sheet went towards monetary policy; today, we are looking at around CHF 80 billion.