If actual output equals potential output so that the output gap is closed, inflation is often in line with the Riksbank’s target, provided that monetary policy and the inflation target are credible. The Riksbank and employment That there is no negative long-term relationship between inflation and unemployment is fairly uncontroversial today, not least shown by the developments since the introduction of the inflation target – unemployment and inflation dropped in parallel during the 1990s. Since 1995, when the inflation target came into effect, CPI inflation has averaged 1.4 per cent, while real wages have grown by around 2.6 per cent. The Riksbank’s formulation of monetary policy has its critics, of course – for example, at the Social Democratic Party’s latest congress the inflation target’s superordinate status over other targets was called into question. Attempts to get the economy to grow at a faster pace than is sustainable in the long term through more expansionary and inflation-tolerant monetary policy would, in the long run, only result in higher inflation without any rise in output or employment. In the short term, though, monetary policy can, as I mentioned, through interest rate changes designed to stimulate or cool down economic activity, affect output and thereby also employment. In the highly simplified output-gap world that I just described, there is a straightforward relationship between monetary policy, the output gap and employment – if the Riksbank does not hit the inflation target then employment will be affected. But reality is more complicated than that.

new mountains that underline the importance of policymakers' capacity to climb up the top. In only two years, the world we knew has dramatically changed. The humankind has faced threats that seemed to be forgotten in the modern world, an unprecedented pandemic and a war in Europe, which are not only a human tragedy, but also supply shocks with significant economic costs that may profoundly reshape the world economy and geopolitical landscape. This environment creates many challenges for the macroeconomic policies, as well. 1/4  BIS - Central bankers' speeches  The pandemic was a shock of unprecedented nature causing global supply disruptions, supply demand mismatches, and exceptional patterns of economic behaviour. However, the policy response was of unprecedented nature and size, contributing to relatively swift and job-reach recovery. Thus, for example unlike GFC when it took seven years for the euro area GDP and almost twelve years for unemployment to return to its pre-crisis level, this time it took only one year to return to pre-crisis level and unemployment to hit record low. These developments are also relevant for some of the CESEE transition economies with strong trade and financial ties with the advanced Europe. This was a showcase of how a sizable and wellcoordinated monetary and fiscal mix can mitigate the adverse effects of a large exogenous shock. Unfortunately, while calibrating our exit strategies and reverting to a normal mode, another shock wave came pushing energy and food prices further up the curve, hence accelerating inflation while overshadowing growth recovery.