However, it can be difficult to achieve the right balance In theory, balancing the need to achieve the inflation target and the need to stabilise the real economy seems relatively simple, even when there is a conflict between these objectives as in 2008. However, when it comes to conducting monetary policy in practice, achieving the right balance is not always so easy. One problem that I have probably underestimated in the past is that there are no simple and unambiguous measures of how much of the economy's resources are being utilised and what should be considered as a normal level for what we call resource utilisation. In theory it is relatively easy to define the so-called production gap. It is often defined as the difference between what is actually produced and what could be produced if the resources available were used to the full. But I do not really think that it is possible to measure this gap with any great degree of precision. One problem is that it is difficult to measure how much could be produced if all the resources were used to the full. This, which is sometimes called potential production, can not be observed directly but must be estimated. 1 At the same time, there is a great deal of uncertainty about the best way to perform such an estimate.
There is also great uncertainty about how strong and stable the recovery will be. It is positive that there has been a clear improvement in the situation on the financial markets. This reduces the risk of a serious setback. On the other hand, the situation on these markets has not completely normalised. Central banks around the world will continue to use various measures to help the banks find funding. The extensive fiscal policy stimulation measures that have been and are being implemented in all the major economies have in all likelihood helped to dampen the fall in GDP. But, they are also leading to increases in national debts. This can create anxiety among the households and thus entails a risk that recovery will stop short. Nevertheless, the situation looks brighter today than it did a couple of months ago. This in itself justifies a somewhat tighter monetary policy than that which we regarded as a wellbalanced monetary policy in July. However, there are also factors that can have the opposite effect and thus represent arguments for a more expansionary monetary policy. The development of the krona has been stronger than we expected. Just as it is difficult to explain the earlier weakening of the krona in terms of developments in the Swedish economy, it is difficult to explain the recent appreciation in the krona. The best explanation might be that it is a question of an adjustment towards more normal levels after the exchange rate had strongly deviated from its long-term reasonable rate.