Woodford, M. 2001. “Imperfect Common Knowledge and the Effects of Monetary Policy”, National Bureau of Economic Research working paper, no. w8673. 12  BIS central bankers’ speeches
But as it normally takes a while before an upturn in economic activity has an impact on employment, it is very possible that the Riksbank will need to raise the repo rate in a situation where unemployment is still high. This is also something we are assuming in our most recent forecast. There is then a risk that unreasonable requirements will be made of monetary policy. It will then be important to bear in mind that the primary objective of monetary policy is to create good long-term conditions for all participants in the economy. It is important that we have an active discussion of the Riksbank’s policy. But for the discussion to be fruitful it must be based on realistic expectations of what monetary policy can and cannot achieve. Sweden is a small, export-dependent economy and when economic activity abroad suddenly falls, monetary policy cannot prevent negative effects from this on our economy. But we can alleviate these effects. As the financial markets are integrated, we cannot prevent an international financial crisis having effects here, too. Then we must use other tools, parallel to our interest rate policy, to make the financial system function in the best possible way given the circumstances. This is what we have done throughout the autumn and we will continue to do this as long as is necessary. BIS Review 38/2009  7