According to the government bill, the Riksbank should support the objectives of general economic policy with the aim to achieve not only high employment but also sustainable growth. However, the idea is hardly that there is any conflict between sustainable growth and high employment. The Riksbank writes at the beginning of every Monetary Policy Report that, in addition to stabilising employment, it also endeavours to stabilise production around a long-run sustainable development path. Nor is the idea here that there is any conflict between stabilising production and stabilising employment around a long-run sustainable path. However, in practice, the estimation of a sustainable path for production in addition to a sustainable path for employment requires assumptions about and estimates of sustainable average working hours, sustainable total factor productivity and a sustainable path for the capital stock. These assumptions and estimates introduce such large sources of error, and such a large degree of arbitrariness in a sustainable path for production, that in practice such a path provides no guidance for monetary policy. It is better to focus on stabilising unemployment around an estimated long-run sustainable rate. To estimate the long-run sustainable unemployment rate is not easy, but it is much easier than estimating a long-run sustainable path for production. Estimates of the long-run sustainable unemployment rate can also be examined and evaluated, while estimates of a long-run sustainable path for production will in practice become more or less impossible to verify. With regard to specifying price stability, what measure of inflation should be used?
Criteria 3, 4 and 5 introduce conditions that cannot easily be observed. We have to apply judgement. The criteria contribute to consistency and structure the discussion. The Riksbank also applies judgement when selecting the interest rate path. But Svensson does not discuss possible shortcomings in the macroeconomic model. In Chart 10, he shows how the various interest rate paths, differing by around ½ percentage point in the period to summer, could result in differences in the inflation rate of close to 4 percentage points as early as next autumn. Monetary policy seems to be having a very strong impact. It would be interesting to hear whether he thinks that relying so heavily on such a model in interest rate setting is robust, and how possible errors in the model should be guarded against. We also know from experience that market participants’ perceptions can differ from ours, particularly somewhat further ahead. There can be a variety of reasons for these differences and Svensson discusses a number of them. It would also be useful to study the volatility surrounding publication of key macroeconomic variables. We would prefer to see lower volatility around monetary policy meetings, and that any surprises are postponed to a time closer to the publication of new macroeconomic data. Solberg Johansen (2008) – winner of the Bertil Ohlin prize for best thesis in international economics at the Stockholm School of Economics – examines volatility in the yield curve.