##aluations. another reason, which was partly connected to this, was that fiscal policy was often too expansionary, with rapidly rising public spending and tendencies towards structural deficits as a result. in addition, there was a deregulation of the credit market in the mid - 1980s, which would turn out to lead to greater problems than were anticipated when the reform was implemented. 1 in the early 1990s, these and other ingredients contributed to another domestic cost crisis, which also coincided with a financial crisis largely caused by excessive lending to households and companies. unemployment rose sharply and public finances deteriorated dramatically. the krona was put under strong pressure by investors who expected sweden to devalue again soon and, in november 1992, the riksbank was forced to give up its defence of the fixed exchange rate. new policy with emphasis on long - term anchors the consequences of the crisis emphasised, with all desired clarity, that the type of policy sweden had pursued for a number of decades had reached the end of the road and needed to be fundamentally reshaped. instead of defending a fixed exchange rate, the task of monetary policy from now on would be to keep inflation low and stable. for its part, fiscal policy would focus considerably more than previously on keeping public finances in good condition so as to maintain market confidence. gradually, the new order was confirmed through changes in the fiscal and monetary policy frameworks. the price stability target, which, in practice, had been introduced in 1993 in the form of an inflation target, was written into law in 1999, at the same time as monetary policy decisions were delegated to an independent executive board. in fiscal policy, the budget process was changed so that it would be easier to gain control over expenditure developments, while public net lending would, on average, show a surplus. the purpose of the latter was, of course, largely to bring the rampant government debt under control and to restore confidence in public finances. but other reasons were also given when the surplus target was introduced, namely that good public finances create room for stabilisation policy and that an ageing population entails challenges that need to be addressed. 2 the surplus target was thus seen not only as an end in itself, but also as a means of increasing the fiscal room for manoeuvre over time. this was, of course, a wise way of dealing with the problems that the swedish economy had been struggling with for so long. in order for monetary policy and fiscal policy – and thus

##b ( 2021 ). 8 of course, it is not self - evident that this number should be exactly 2. according to the previous reasoning, a higher target would give more room to lower the interest rate in bad times and i myself have raised the question of whether a target of 3 per cent should not be considered instead ; see jansson ( 2020 ). 5 lead to an increase in the government ’ s interest expenditure and will challenge the sustainability of public finances. a common view is that monetary policy is in the driver ’ s seat the practical application of macroeconomic policy under this policy regime is often described as a situation in which monetary policy is sitting in the driver ’ s seat and is expected to play the active part in stabilisation policy. it is monetary policy that is expected to keep the economy in balance and inflation stable. fiscal policy is perceived to have a more passive role, which in principle is restricted to adjusting taxes and expenditure when this is necessary to keep public debt stable over the long term. 9 it is not considered to have any explicit stabilisation policy task, other than that which follows from the automatic stabilisers, except possibly in the event of deep recessions or crises. this view has had a major impact throughout the world, both in academic research and in policy departments at finance ministries and central banks. conducting macroeconomic policy with this division of roles has also worked relatively well in most places, not least in sweden. it has thus been an arrangement with which most people have been pretty content. the division of roles may no longer be so obvious but perhaps it is time for us to begin to ask ourselves whether this division into an active monetary policy and a more passive fiscal policy really is the best way to achieve a favourable macroeconomic development in all situations. perhaps the division has been taken a step too far after all, given that certain circumstances have changed. i think this is something we may now need to reconsider for at least a couple of reasons. monetary policy and fiscal policy are probably more dependent on each other than we usually think, and this dependence has become even clearer as the macroeconomic environment has changed quite a lot in recent decades. for quite long periods, it may indeed work well if monetary policy is focused on maintaining the inflation target and fiscal policy on keeping track of public finances – that they manage their own business, so to speak. indirectly, the two policy areas nevertheless provide valuable support to each other. assume, for example, that inflation begins to