Examples of such factors are, internationally determined raw material prices, changes in taxes and subsidies and interest expenses for housing. An increase in value-added tax would, for instance, temporarily lead to increases in CPI. To counteract such price increases, monetary policy would be forced to dampen the real demand in the economy regardless of the level of resource use in the economy. To avoid such unnecessary fluctuations in production, we disregard from factors which we assess only temporarily affect consumer prices, for example interest expenses, taxes and subsidies. The inflation target regime tested in a strong upswing! Before the economy had adapted to the new inflation target regime and inflationary expectations still remained at too high a level, it was not as evident that monetary policy in the short term could contribute to maintaining the growth of its long-term growth track. In order to bring inflation expectations down, higher interest rates were required and thus lower demand than if inflation expectations had immediately been adapted to the new regime. Although the economy is now approaching balance, all parts of the low inflation regime have still not been tested. During the entire 1990s, the use of resources has been under its long-term growth track. It is first during the few years to come that we will have a real test of how well the new regime has penetrated in Sweden. In earlier speeches, I have developed my ideas around the mode of functioning of the labour market.
The argument was rather that the economy could suffer a deep recession in the long term if developments led to a bubble arising which then burst. 9  ECB (2009). 10  IMF (2009). 11  Borio and Lowe (2004). 6  BIS Review 162/2009  The economists Francesco Giavazzi and Frederic Mishkin expressed concern in their assessment of Swedish monetary policy between 1995 and 2005 that the Riksbank had given too much consideration to house prices. 12 However, monetary policy that entails flexible inflation targeting – like that conducted in Sweden – has the aim of stabilising inflation around the inflation target and also resource utilisation. This means that temporary deviations from the inflation target may be motivated if the inflation target is attained in the longer term. This was also the assessment made by the Riksbank. House prices in Sweden rose by 3 per cent between the second and third quarters of this year, after a slowdown in 2008 and the average price increase since 1996 has been around 8 per cent a year. The question is whether this is a sustainable long-term development. There may be risks with this, even if the upturn is not as large as in some other countries which have recently experienced downward adjustments. Developments in the housing market in Sweden also differ in that new construction has been considerably lower than in a number of other countries.