. this is because the resulting economic slowdown and inflation go hand - in - hand. past experience and the consensus among economists suggest that, when there is a high risk of second - round effects, in other words when a cost shock feeds into overall price increases by way of rising wages, monetary tightening is necessary. in the situation we face today, however, the financial markets are very unstable and their future direction is unclear. we therefore need to be cautious in coping with price pressures. this is because the downside risks to growth increase while the upside risks to prices dwindle, as the financial market turmoil has an ever greater impact on the real economy. a forward - looking monetary policy that takes account of medium and long term macroeconomic trends also becomes more difficult at a time like this, as uncertainty mounts concerning economic conditions at home and abroad. for countries facing foreign currency fund - raising problems, meanwhile, constraints on monetary policy easing may exist even when the downside risk to growth is substantial. easing of monetary policy could adversely affect their foreign exchange supply and demand conditions. even though central banks are confronted with such manifold difficulties, however, they must do their utmost as far as circumstances allow, to prevent the erosion of the foundation for price stability. only if they act in this way can central banks, whose main purpose is the maintenance of price stability, retain public confidence. and on this basis they can secure the effectiveness of their monetary policy. closing remarks fellow central bankers, i am sure that this week's seminar will provide an opportunity for lively discussion on the most desirable ways for central banks to tackle the stagflation threat, particularly when financial markets are in turmoil as they are today. drawing my remarks to a close, let me express my wish that this seminar may contribute to stronger cooperation among all of our central banks, by fostering good fellowship among us. although i know your days this week will be fully occupied, i hope you will also spare a few moments to savor the beauties of korean culture and the autumn colors.

up to expectations ( figure 1 ). following the initial deep crisis, inflation has been much lower and fluctuated less than in the 1970s and 1980s. at the same time, growth in the economy has been higher and more stable than before. real wages have also developed favourably. in many respects, developments in sweden are good also from an international perspective, and this was certainly not the case during the 1970s and 1980s. there are, of course, areas where developments have not been so positive. this applies in particular to employment. however, the insight that employment in the long term depends on how well the labour market functions is beginning to gain ground. this is where efforts should be made to obtain a longterm solution to the employment problem. the decisive factor is not how the riksbank sets the interest rate or how expansive fiscal policy is conducted. the idea that there is no conflict in the long term between objectives for good employment and low inflation is otherwise one of the reasons why edmund phelps is this year being awarded the riksbank ’ s prize in economic sciences in memory of alfred nobel. now, i do not wish to claim that everything positive that has happened is due to better thought out economic policy. there have also been significant changes in other areas that have contributed to the favourable developments. however, it can be observed that the changeover of monetary policy has given a steadiness and stability to economic policy that was previously lacking. this should be a fairly important factor. … and a little closer let me now say something in more detail regarding the developments over the past 3 - 4 years, as these have been rather special in some ways. at least at first glance, growth, inflation and employment have developed in a slightly contradictory manner in relation to one another during this period. since the middle of 2003, inflation has been below the target of 2 per cent, and periodically far below this ( figure 2 ). it is really only during the past six months that inflation has once again begun to approach levels reasonably in line with the target. at the same time, growth has been high. since 2004, gdp has increased by slightly more than 3 per cent a year on average. this is a fairly remarkable figure, both in historical terms and in comparison with many other countries, in particular europe. all in all, inflation has been remarkably low, while growth has, if anything, been higher than usual. despite the good growth, employment has developed weakly. the high demand for goods and services