To put it simply, we usually put the brakes on when economic activity is rising and we accelerate when it is falling. Inflation targeting should thereby often be able to contribute to smoothing the business cycle. It is also possible that it can reduce fluctuations in unemployment. However, it is not reasonable to believe that the fluctuations in economic activity can be eliminated entirely. It is therefore seriously misleading to make the Riksbank responsible for the difference between actual unemployment and what could potentially have been attained if it had been possible to abolish fluctuations in economic activity. What we can hope for is a slightly more stable development, which we appear to have attained over the past ten years, although it is too early to draw any completely certain conclusions. The policy is flexible Another question which arises in the discussion now and then is how mechanical or how flexible the policy should be and how it should then be assessed. The Riksbank currently conducts what is known as flexible inflation targeting. We are definitely not what my British colleague Mervyn King would call “inflation nutters”. The focus lies not merely on stabilising inflation under any circumstances; as long as there is fundamental confidence in the policy, that we will have low inflation in line with our target, we also take into account other factors. In January 1999 we published a clarification of our policy.
BIS central bankers’ speeches  inflows into U.S. Treasuries in order to keep the renminbi from appreciating too rapidly. The U.S. terms of trade improved as the cost of imported goods dropped, and U.S. interest rates stayed relatively low as China recycled its trade surpluses back into U.S. financial assets. For China, the benefits included strong economic growth, technology transfer and the creation of many manufacturing jobs. These developments, in turn, helped foster rising living standards and political stability in China. These outcomes were by no means all the result of a deliberate grand strategy. But I think this is a reasonable, albeit overly simplistic, description of what happened. Although the pre-crisis arrangements worked reasonably well for a while, the flaws became increasingly evident over time. Looked at from the lens of the developed world, the combination of rapid gains in production capacity and relatively repressed consumption in the EME world helped foster a global deficiency of demand relative to supply. In these circumstances, the United States and many other industrialized economies had to sustain domestic demand at elevated levels in order to achieve “full employment” and prevent deflation. For the United States, the consequence was elevated consumption facilitated by asset price inflation, easy underwriting standards for credit and structural budget deficits. Of course, this particular outcome was not preordained or caused by the EMEs. There were multiple combinations of domestic demand consistent with full employment in the United States during the pre-crisis period.