Inflation has been higher in Sweden than in Germany for long periods of time. During the 1960s we more or less kept pace with Germany. However, during the second half of the 1970s and in the 1980s, inflation in Sweden was several percentage points higher than that in Germany each year. Since the beginning of the 1990s, inflation in Sweden has once again been roughly the same as that in Germany. Sweden has become a low inflation economy. What, on the whole, has happened since the 1960s? To illustrate this, I shall talk about some of the episodes of the past 30 years that have had great significance for economic developments and for my own view of the Swedish economy. I have been able to follow the economic policy decision-making process connected with these episodes at close quarters from my various posts in public administration. I would like to emphasise that this is my personal view of developments and not the Riksbank’s official view. The episode I will talk about include the cost crisis in the 1970s and overheating in the 1980s, the change in exchange rate and monetary policy, the wage formation reform and budget consolidation of the 1990s. The cost crisis of the 1970s During the 1960s, economic growth in Sweden wad good. GDP growth was at a high level, inflation was moderate, unemployment was low, foreign trade was largely in balance and public finances were strong.
When this system broke down in 1973, a currency collaboration was started up between a number of European countries, known as the currency snake, by which the krona was pegged to a currency basket dominated by the German D-mark. In 1977 Sweden left the currency snake and the krona was pegged to a currency basket where the dollar had a double weight in relation to the trade exchange. In 1991 the krona was instead pegged to the European currency unit, the ecu. During the 1970s, Sweden was still applying credit and foreign exchange regulations. The credit regulation limited the banks’ lending and foreign exchange regulation limited the opportunities to move currency, securities and capital across borders. Both types of regulation entailed limiting the opportunities for efficient allocation of capital and they became increasingly difficult to maintain as time went by. The credit market was deregulated in 1985 and the final parts of the foreign exchange regulation were abolished in 1989. The idea behind an exchange rate regime with a fixed exchange rate is that inflation in Sweden will adapt to inflation in other countries. Economists usually call this international inflation functioning as a nominal anchor. However, it did not succeed, as Sweden did not manage to stay even with other countries regarding inflation and cost developments. The economic policy conducted and the way the economy functioned during the 1970s were not compatible with a fixed exchange rate.