International comparisons as well as surveys and similar studies that have been carried out by external analysts in the media, for example, confirm that the Bank’s monetary policy communication has worked fairly well. However, this doesn’t mean – and I want to stress this – that there are no examples of episodes when our communication in my opinion could have been better. My conclusion is that the Bank’s policy in the past ten years has worked well. Nonetheless there is of course every reason to reflect on whether the analysis that we carry out and the framework that we follow in our monetary policy work could be improved. That is the aim of the rest of my speech. Some thoughts on how to develop the Riksbank’s monetary policy work Methodological aspects Let me begin by addressing an issue that is of a rather technical or methodological nature, but that, as we also shall see, has a number of further consequences: the choice of repo rate on which the inflation forecast is based. Since 1996 the Riksbank’s Inflation Reports have presented overall assessments of the economy and inflation that have served as a guide for policy. From the fourth Report in 1997 these have included numerical, relatively detailed forecasts. The published forecasts have consistently been based on the assumption of an unchanged repo rate, above all because forecasts arrived at in that way make it easy to motivate changes in policy.
Nevertheless, even if a serious lending boom during euro area accession seems unlikely, policymakers should remain vigilant and prudent banking sector supervision should be the right answer to protect oneself against the risk of such developments. BIS Review 67/2007  3  Second, higher domestic demand can fuel inflation pressure and increase imports, thus leading to a higher current account deficit. As for the latter, it seems that while outside a monetary union deep current account deficits worry investors and can, in extreme situations, lead to currency crises, for countries that have already joined the common currency such developments do not matter much. An example of the three Baltic States (Estonia, Latvia and Lithuania), whose currency board arrangements are close equivalents of a monetary union, shows that enormous current account deficits (9-16% of GDP in 2006) have no apparent negative consequences for the economy, as yet. The case is, however, different with inflation pressure. In theory, the margin for local demand-driven price increases in small member states of monetary unions is very narrow. This is guaranteed by the so called law of one price – the expectation that the same product should have the same price in various countries of a monetary union. In practice, however, there are several obstacles for this law to hold perfectly – some goods cannot be traded, most goods do not have perfect substitutes, there are transportation costs and tax differentials – so local demand pressures can play a role in driving prices in monetary union member states.