The falling price level has to do with transitory effects, above all the Riksbank’s marked reduction of the repo rate during 1996. Excluding house mortgage interest costs, the rate of inflation in January 1997 was about 1.5 per cent. The outlook for inflation points to room for a fall in bond rates. Moreover, underlying economic factors suggest that, after the depreciation in recent months, the krona is undervalued and should be capable of appreciating. The present monetary stance appears to be well balanced. After the major changes in the past year, for example in the repo rate, time is needed to assess their effects. Another matter to consider is the recent months’ developments in financial markets. They, too, call for a cautious line in monetary policy. I note that the Swedish economy seems to have made good progress in adjusting to a low inflation regime, with stable, sustained growth. What gives cause for concern, however, is that the recovery of employment appears to be much more sluggish and that unemployment is persistently high. High cost of unemployment  As shown in Diagram 1, registered unemployment in Sweden rose sharply in the early 1990s; from a level between 2 and 3 per cent, it shot up to around 8 per cent. This was accompanied by increased participation in labour market programmes. Total unemployment accordingly reached around 13 per cent, an increase of almost 10 percentage points or up to half a million people. This is the highest level since the 1930s.
12  10  10  8  8  6  1 6 -6 4 y rs . 6  4  4  2  2  0  0  76  77  78  79  80  81  82  83  84  85  86  87  88  89  90  91  92  93  94  95  96  S o u rce : S ta tis tics S w e d e n  approximately the same magnitude as the unemployment rate.1 Sweden’s increase in unemployment can in this way be estimated to cost around 10 per cent of GDP a year, which is equivalent to SKr 150 billion. Considering the sensitivity of general government finance to variations in unemployment and production, the cost to the public sector, in the form of lower  1  Assuming that changes in the capital stock roughly parallel employment and that average productivity is constant. BIS Review 38/1997  -4-  tax revenue and increased expenditure on unemployment support, for example, may actually be as high as 9 per cent of GDP or SKr 135 billion.2 Conversely, an appreciable reduction of unemployment implies decreased social tensions as well as substantial economic gains.