The most recent episodes when inflation has been below target – at the end of the 1990s and the start of this decade – have been characterised by unexpectedly high productivity, unexpectedly low imported inflation and other more temporary supply shocks. The low inflation has not been because we have actively tightened monetary policy and dampened demand. In reality, monetary policy has been very expansionary. With the aid of the repo rate the Riksbank can influence demand. How companies then meet this demand by varying the number of employed depends on how productivity develops, and that is nothing that monetary policy can control. Nor have we any possibility to govern how many people enter or leave labour market policy measures. Is Swedish wage formation competitive? When an economy is in balance, with wage and profit shares constant, companies’ real wage costs increase in parallel with productivity growth. But the relationship between wage increases and competitiveness is different under a fixed and floating exchange rate. With a fixed exchange rate, competitiveness is determined first and foremost by how big wage increments in Sweden are compared with other countries. If wage costs increase too rapidly, costs crises arise that can result in higher unemployment or that force the country into devaluations with a view to restoring competitiveness, as was the case in Sweden during the 1980s. The problem with the repeated devaluations was that they eroded the fixed exchange rate’s credibility.
Villy Bergström: The labour market and wage formation Speech by Mr Villy Bergström, Deputy Governor of Sveriges Riksbank, at the Association of Swedish Engineering Industries' HR director conference, Rimbo, 22 November 2005. *  *  *  Introduction Thank you for your invitation to come and speak here. Today, I will not be touching upon current economic policy in Sweden or the weakening of the krona exchange rate. I will return to those issues in a couple of days in a different speech. The shift in economic policy at the start of the 1990s has entailed better conditions for wage formation in Sweden. Among other things, the adoption of the inflation target has reduced uncertainty over future price developments. Wage-earners do not have to worry that their wage increases will be eroded by excessively fast price rises, while it is easier for employers to determine their scope for wage costs. The lower uncertainty over inflation is reflected in the fact that inflation expectations since the mid1990s have been firmly anchored around 2 per cent. It is important to remember that the current conditions for wage formation in Sweden – a floating exchange rate and inflation target – are considerably different from our previous regime with a fixed exchange rate. A fixed exchange rate was the norm in Sweden for some 130 years, even though the systems for maintaining it changed.