involved last autumn. monetary policy therefore has to be based on an assessment of inflation prospects that is as comprehensive as circumstances permit. the exchange rate is one important factor in this assessment but normally it should not play an isolated role. that is why the riksbank has chosen not to use a monetary index — a weighted combination of interest rates and the exchange rate — as an intermediate target. the riksbank ’ s view of the exchange rate has altered a good deal since 1992. we have gradually placed more emphasis on the krona ’ s forecast path and been less concerned about its occasional fluctuations. as i see it, a number of things have contributed to this. it has proved difficult to show that attempts at short - run exchange rate stabilisation, using either the repo rate or interventions, have been particularly successful. neither does experience from other countries with a flexible exchange rate provide all that much support for such a policy. at the same time, increased credibility has made the gradual modification of the riksbank ’ s view easier. the riksbank has accordingly chosen to be comparatively inactive in the currency market. at the same time, an exchange rate that is highly volatile and displays pronounced fluctuations clearly has drawbacks ; the uncertainty it generates is liable to spread to other financial markets, besides complicating corporate and personal decisions about investment, production and consumption. in recent years the riksbank has therefore occasionally chosen to intervene in the foreign exchange market in order to underscore its appraisal of the situation. it need hardly be said that if such interventions had been judged to conflict with the inflation target, they would never have been considered. as long as the riksbank targets inflation directly, i see no reason to change the current principles for our behaviour in the currency market. but i also want to underscore that the approach to the exchange rate in an inflation targeting strategy is by no means self - evident. some central banks that target inflation — the bank of canada is one example — seem to react to short - run exchange rate fluctuations more frequently, sometimes guided by a monetary index, partly with the aim of stabilising markets and expectations. their behaviour in this respect is more reminiscent of how the riksbank acted in the early stage of the flexible exchange rate regime. the operations of other central banks, in the uk and australia, for instance, are more akin to the riksbank ’ s current practice. comparisons of exchange rate fluctuations in different countries with a

mr heikensten speaks on monetary policy with a focus on exchange rate speech by the deputy governor of the bank of sweden, mr lars heikensten, to riksbank ’ s primary dealers in stockholm on 19 april 1999. since november 1992, when the defence of the krona ’ s fixed exchange rate was abandoned, much of the discussion concerning monetary policy has involved the exchange rate. at this traditional meeting with the riksbank ’ s primary dealers, i should like to consider four issues connected with sweden ’ s currency. one of these issues is the function of the krona in a monetary policy regime that targets inflation with a flexible exchange rate. another issue is the actual path of the exchange rate in recent years and the conclusions it warrants. the euro ’ s introduction at the beginning of january has revived the question of sweden ’ s participation in emu ; this raises the other two issues, namely the process towards erm membership, if this is envisaged, and aspects of setting the future erm rate that would then ensue. monetary policy significance of the exchange rate the floating exchange rate regime that was introduced for the swedish krona in november 1992 was regarded by many people as a fairly temporary arrangement. they considered that for sweden, as a small country dependent on foreign trade, a fixed exchange rate was most advantageous, so the riksbank ought to try to reintroduce a fixed rate regime as soon as possible. since its introduction in 1993, however, the inflation target has proved to be a good compass for achieving and maintaining price stability. confidence in the monetary policy regime has gradually grown and now seems to be firm. inflation and inflation expectations are low. since the cyclical upturn in the summer of 1993, annual gdp growth has averaged almost 3 per cent, government finances have been rapidly consolidated and sweden has begun to repay external debt. important forecasting variable during lengthy periods of financial unrest and problems with confidence in sweden ’ s economy the riksbank judged that the krona was undervalued. at times, moreover, the exchange rate fluctuations have been relatively marked, even after it seemed that economic policy ’ s credibility had been established. in the period since the fixed exchange rate was abandoned the riksbank has not targeted the exchange rate. for monetary policy, the primary consideration since 1992 has been the picture of inflation prospects in relation to the targeted rate of 2 per cent. but the exchange rate is still one important factor in the