as normal and wage demands will be based on this level. with higher nominal wage increases, real wage costs will move up again and unemployment will tend to return to its initial level. in the figure this means moving from b to c. in order to boost employment in this situation, inflation would have to rise to say 15 per cent and the procedure will be repeated. all that is ultimately achieved is higher average inflation. the level of unemployment to which an economy returns when inflation expectations have adjusted is usually referred to as equilibrium unemployment. it is determined by structural factors such as demographic changes, technology and the institutional set - up in the labour market, factors that are immune to monetary policy. the important conclusion to draw from this is that permanently low unemployment cannot be achieved by accepting permanently high inflation. under favourable circumstances, to which i will shortly return, monetary policy can promote an economic recovery ; but an appreciable improvement in the unemployment situation calls for measures in many other fields, above all in the workings of the labour market and wage formation. what should monetary policy aim for? if a central bank is incapable of “ creating jobs ” on a permanent basis, what should be its primary task? by means of an appropriately balanced monetary policy a central bank can determine, or at least strongly influence, the rate of inflation that prevails in the economy and underlies economic decisions by firms and households. price increases are, of course, conditioned by many other factors, such as the economic situation, the fiscal stance, wage formation and so on. but inflation is a monetary phenomenon and in the longer run the riksbank, by controlling the supply of money in a wide sense, can also control its value in terms of inflation. the perception that the primary task of a central bank should be to maintain price stability can be said to have won general acceptance. in that low, stable inflation helps to improve the functioning of markets, it seems reasonable that, indirectly, monetary policy also promotes economic growth and employment. in their economic decisions, households and firms have one less source of uncertainty - inflation - to worry about. the inability of monetary policy to affect long - term employment and the fact that it should focus on maintaining price stability does not mean that its capacity to condition production and employment in the short run can not sometimes be used for stabilising activity. monetary policy can contribute to an economic recovery in so far as this is feasible without jeopardising price stability. problems may arise, however, if monetary

bring down inflation, which is worrying not only because inflation has been too high for too long, but also because the impact on prices may be higher than normal. on a more general level, exaggerated variations in the exchange rate are not good for real economic developments and the swedish economy as a whole. the exchange rate regime is not decisive for a country's prosperity so the krona is important and the significance of the exchange rate development should not be underestimated. but nor should one exaggerate the importance of the exchange rate for a country's welfare. sometimes one can get the impression from the debate that sweden's economy stands and falls with the value of the krona, and that a strong krona means that sweden is doing well and vice versa. but of course it isn't that simple. welfare is not created by the level of the exchange rate, but by good long - term growth. this in turn is determined by the productivity of companies and citizens, good innovations and how well the economy as a whole functions. and here too, low and stable inflation is an important factor in creating a foundation for economic growth and welfare. comparing welfare in different countries is always tricky and there are many different ways to do so. but if we compare sweden with two of our nordic neighbours – denmark with a fixed exchange rate against the euro and finland, which has adopted the euro – it turns out that there have been no major differences in real economic development in recent decades, despite different exchange rate regimes. gdp per capita has grown roughly as much since the introduction of the euro in 1999. the krona will strengthen, but it is difficult to say exactly when and how much to sum up, the krona is currently undervalued and there are forces that can continue to keep the value of the krona down in the near term. but the longer its value is held down, the more important the " fundamentals " will become. because the swedish economy is essentially well - managed and sooner or later this will lead to a stronger exchange rate. sweden has strong public finances, a well - educated workforce, responsible wage formation and underlying good competitiveness. as everyone who has tried to make forecasts for the exchange rate knows, it is genuinely difficult to say exactly when it will strengthen and how much. but it can happen quickly once the trend is broken and the krona strengthens again. 3 / 4 bis - central bankers'speeches 1 the imf's assessment is that