. the interest rate path that underpinned the forecast in the october inflation report was judged to imply a reasonable development of inflation in the coming years. our conclusion was that if this development were to continue in line with our assessment at the time, the repo rate would need to be raised in the period ahead. at the same time, we pointed out that there also were different conceivable paths for the future repo rate that could give roughly the same outcome for inflation. 4 / 6 growth in the swedish economy continuing to strengthen for the swedish economy, too, it was concluded in the inflation report that the economic upswing appeared to have gained impetus again after the slowdown at the start of the year. compared with the previous assessment, gdp growth and resource utilisation were forecast to be somewhat higher in the years ahead, largely owing to more expansionary economic policy. all in all, the assessment was that growth would be relatively firm in the swedish economy in the coming years. the recent years ’ high productivity growth has partly laid the foundation for this development. companies have been able to boost output with their present workforces, which has improved their cost situation and held back price increases in the economy. the low inflation rate has enabled monetary policy to be expansionary for a comparatively long period. in addition, the high productivity and relatively good profitability is anticipated to create scope for comparatively favourable wage growth in the period ahead. this means that there are good prospects for firm growth in domestic demand over the coming years. expansionary fiscal policy will also help to boost domestic demand, while more robust growth in swedish export markets will contribute to stronger exports. new information broadly supports the picture of a continued improvement in economic activity in sweden. the national institute of economic research ’ s ( nier ) latest business tendency survey provides a relatively bright picture of economic conditions in most of the surveyed industries. the confidence indicator has risen for both the manufacturing and construction industries as well as for trade and services industries. new orders in manufacturing have picked up, mainly in the export market but there has also been a clear improvement in the domestic market. monthly data for foreign trade in goods also indicate an increasingly bright picture for exports. like the developments elsewhere in the world, the swedish purchasing managers index for october also showed a positive development. new data for retail sales point to continued relatively strong rises. at the same time, the nier ’ s consumer survey for october provides somewhat mixed signals. households have become slightly less optimistic about

. if irrational players nevertheless act in a similar way, any influence on financial prices is eliminated by other, more professional agents via arbitrage, which is assumed to be quick and effective. the irrational players accordingly suffer losses and therefore ultimately leave the market. in this way, the competition between rational and irrational investors, together with the existence of arbitrage, results in financial markets remaining efficient. in the past two decades, however, the notion of financial market efficiency has been challenged, which will hardly surprise those with practical experience. this is mainly because the possibility of arbitrage has proved to be much more limited than assumed earlier. studies in recent years have demonstrated the occurrence of periods when prices deviate appreciably from more fundamental levels. a new line in financial science, behavioural finance, has emerged, aimed at explaining why price deviations occur and developing tools for predicting them. academics in this field have turned to experimental psychology and other disciplines to explain the mind - set of financial market players. in a notable paper by a princeton professor, robert shiller, it had already been shown in the early 1980s that share prices are considerably more volatile than would be expected if they were determined by the current value of expected future dividends. this was remarkable in that according to the efficient - market hypothesis, it is only changes in fundamental factors, for instance profits or dividends, that ought to affect share prices. further studies later in the 1980s indicated that future developments can be explained by historical price movements. a look at the share prices of two groups of firms – extreme losers and extreme winners – reveals that the group with the worst share performance in the first period gives a better return in the coming five years than the group that did best and vice versa. in the second period the undervalued shares recovered their fundamental value and the overvalued fell correspondingly. studies with a shorter horizon confirm that shares which have begun to rise continue to do so and conversely, shares which have started to fall often continue to do so in the short run. the intuitive markowitz, h. m. ( 1952 ), portfolio selection, j. of finance, vii : 1 ( march ), pp. 77 – 91. fama, e. ( 1970 ), efficient capital markets : a review of theory and empirical work, j. of finance 25, pp. 383 – 417. this point has been made by, for instance, milton friedman and eugene fama ; see friedman,