This document will be available by tomorrow on the Bank's web site at www.banque-France.fr, and it will be constantly updated. Thank you for your attention. BIS Review 115/2000  6
As its influence on the economy is subject to a time-lag, monetary policy has to be conducted in a forward-looking manner. Consequently, forecasts play a decisive role in analyses and decision-making. At the same time, the exchange rate, like other prices set on financial markets, is very difficult to forecast.11 Nevertheless, due to its significance for the development of small, open economies such as Sweden’s, it is important to form an understanding of exchange rate developments. The Riksbank tries to analyse and forecast the development of the trade-weighted exchange rate, which is to say the value of the Swedish krona against a basket of the currencies of Sweden’s most important trading partners. Due to the volatile nature of the exchange rate, no attempts are made to capture short-term variations in it. Instead, the focus lies on the more long-term trend. The starting point for this a statistical model in which the real exchange rate is related to relative GDP, the terms of trade and net foreign assets.12 However, the final forecast for the exchange rate considers the fact that the exchange rate both influences and is influenced by a multitude of other variables, including the interest rate differential in relation to other countries.13  10  See, for example, Ekholm et al. (2008). Pressure on firms to improve productivity can be seen as a positive aspect of a strong real exchange rate. A weak real exchange rate is otherwise frequently seen as being advantageous for a country as it benefits its exporting firms.