One could also say that long-term credibility and sustainability are necessary conditions for monetary policy and fiscal policy to be able to provide short-term stimulation. A rather worn but appropriate expression used with regard to fiscal policy is to “save for a rainy day” during good times. We appear to have succeeded in doing so this time. So the second of the three global challenges I listed does not actually apply to Sweden. Better regulatory framework also important for us One cannot rule out the possibility that our previous crisis contributed to some extent to our bank system managing better this time than banks in many other countries. But the Swedish banks’ memories still do not appear to have been terribly long. A couple of them were carried away by the over-optimism in the Baltic countries, and most of them would have faced much larger problems if the Swedish authorities had not intervened so resolutely. On the positive side, they largely avoided securities containing high-risk US mortgages. New share issues and good earnings capacity mean that the Swedish banks now appear well-capitalised from an international perspective. The first challenge – the design of a better regulatory framework and more effective supervision – is of course something to which Sweden is contributing in various ways. Our own financial markets and banks coped relatively well on this occasion, but it is nevertheless clear that we are also hit hard when there is international turmoil.
We also have an expenditure ceiling and a surplus target in the fiscal policy area, which are designed to prevent public finances being undermined or savings having to be made in inappropriate situations. Sweden has been one of the countries in the front line, both in reforming the framework of monetary policy and that of fiscal policy. Many other countries have later made changes similar to the ones we made. It is also worth noting that  4  BIS Review 149/2010  the most recent crisis, and the public finance problems it has entailed, have triggered a new wave of interest in fiscal policy regulation. 3 The stable frameworks for monetary policy and fiscal policy have in many ways functioned as “shock absorbers” in this crisis. Unlike during the previous crisis, economic agents have been able to assume that inflation will be fairly stable and that public finances will remain under control. This creates a security which I believe is particularly valuable during periods like this, when there is considerable uncertainty in general around the world. I imagine, for instance, that households in countries with weak public finances are much more concerned about the future. …and make it easier to stimulate the economy The stable frameworks have also made it easier to stimulate the economy strongly during the crisis without anyone questioning the credibility of the inflation target or the sustainability of our public finances.