kristina persson : monetary policy and labour supply speech by ms kristina persson, deputy governor of sveriges riksbank, at a meeting arranged by the municipality of orebro, orebro castle, 2 april 2003. * * * thank you for the invitation to participate in this conference and for the opportunity to inform you about current monetary policy and the riksbank ’ s objectives. i shall also take up one of the major challenges facing the swedish economy over the coming years, namely labour supply and what consequences this may have for future growth and welfare in sweden. monetary policy focuses on inflation the monetary policy objectives are clearly stated in the sveriges riksbank act - to maintain price stability and to promote a safe and efficient payment system. the riksbank has specified the first of these objectives in an inflation target. the annual rate of change in consumer prices shall be 2 per cent, with a tolerated deviation interval of ± 1 percentage point. monetary policy is normally directed at fulfilling this target one to two years ahead. to achieve our objective, we therefore make forecasts of price trends. if the forecasts indicate that inflation will be higher than the target level one to two years ahead, monetary policy must normally be tightened and the interest rate raised. the reverse applies if the forecast shows a lower inflation rate than the target level. although monetary policy is aimed at an inflation target, developments in the real economy and the labour market have considerable significance for the shaping of monetary policy. for one thing, total demand is one of the most important determining factors behind the inflation rate, and for another thing, taking the real economy into account can in certain cases mean that exceptions are made to the fundamental monetary policy rule. this applies in particular in the case of supply shocks : firstly, inflation can be allowed to be higher or lower one to two years ahead, when due to factors that are not considered to have a lasting effect on inflation, and secondly, the real economic costs of a rapid return to the target level are considered to be excessively high. for example, we had particular reason to observe certain temporary changes at the time of our most recent repo rate decision. the riksbank believes that energy prices will fall back from their present high levels without the rise spreading to other prices. another circumstance that affected our forecast was the crisis in iraq, which has now become a war. the geopolitical situation overshadows the more normal inflationary risks that we usually observe. i shall return in

it affects the rate at which the economy can grow and thereby how rapidly our prosperity can increase. deciding factors for the speed at which the economy can grow are investment, labour supply and technology developments - e. g. machines becoming more modern or utilised more efficiently. labour supply, in particular, will affect the growth of the economy in future. if we use statistics sweden ’ s population forecast as a starting point, we can see that the population will increase up to 2009 by an average of 0. 5 per cent a year, which is slightly lower than the increase during the 1990s. thereafter the population will decline by an average of 0. 3 per cent a year. this forecast is relatively certain, compared with forecasts of economic activity. this means that population growth in the long term will undermine welfare. most other european countries share this problem - in most of the larger eu countries the population growth is expected to be even poorer than in sweden. however, this is no consolation - on the contrary, a poor development among our trading partners could cause further difficulties for our own economy. moreover, it is our own ambitions in welfare policy that should be put in relation to our growth capacity. the future age structure has great significance for labour supply and production. this is because labour force participation varies in different age groups. it is higher in the age group 25 - 54 years ( 87 per cent ) than in younger and older age groups. the age group 16 - 24 years studies more today than at the beginning of the 1990s. labour force participation for the oldest age group has also fallen over the past decade. one reason is that the retirement age from the labour market has been lowered and now the actual pension age amounts to 62 years. the only group that has increased its participation in the labour force in recent years is older women. this could be because those who are reaching a more advanced age today have a higher level of education than their predecessors. the age structure accentuates the problems. according to statistics sweden ’ s forecasts, the age group 20 - 64 years will need to support an increasing percentage of younger and older age groups. while the number of elderly people increases, the number of those between the ages of 20 and 64 will become an ever smaller percentage of the population. from having increased by almost one million during the years 1950 to 2000, they will now increase by only 70, 000 over the coming fifty years. this will increase the demands on the older population to participate in the labour force.