Barbro Wickman-Parak: What can monetary policy achieve? Speech by Ms Barbro Wickman-Parak, Deputy Governor of the Sveriges Riksbank, at a meeting, Karlstad, 27 March 2009. *  *  *  Economic policy can be divided up into two areas: fiscal policy and monetary policy. In Sweden and all other countries with independent central banks, there is as we all know a distinct difference between these two policy areas. The Government is responsible for fiscal policy and the central bank for monetary policy. The central bank is not allowed to receive instructions from any other party when carrying out its monetary policy tasks – it is to conduct its monetary policy in an independent manner. So what is the range of the policy area delegated to an independent central bank; that is, what can we expect a central bank to be able to achieve? This question is the theme of my speech today. Economic policy ultimately concerns creating the best possible conditions for long-term growth and thereby a high level of welfare for the population. The given limit for growth is set by developments in the labour force and in productivity. To attain long-term growth the policies must be aimed at, for instance, educating the labour force, creating an incentive structure that stimulates people to work, creating a good innovation climate that promotes technological developments and so on. This is all common knowledge, but may be worth saying sometimes.
To keep things simple, we can assume that the labour and capital shares are constant in the longer run and concentrate on how the return to capital is affected by changes in total factor productivity (the overall efficiency with which labour and capital are utilised in production). A higher return to capital should imply a higher rate of increase in corporate earnings. Conversely, an accelerating growth of corporate earnings should show up as a rising return to capital at the macro level. 5  BIS Review 137/1999  Conclusions From what I have said this evening it is possible to draw two conclusions that at first sight may seem to be somewhat contradictory. On the one hand we have noted that stock market values are historically high and that in the past this has normally been followed by some form of correction. On the other hand, there may be some grounds for arguing that changes have occurred in expected stock market returns and/or the economy’s potential growth rate which could justify a stock market valuation above the historical level. In the United States there are at least signs that point in this direction. For Sweden, however, figures at macro level have not yet been discerned that would confirm such a change. But these two conclusions are not necessarily contradictory. Present stock market prices could mirror a combination of “irrational exuberance” and a change in the fundamental picture of the global economy. The impact of the new information technology may be leading to higher productivity growth.