##imated initially and because demand was weaker, partly as a result of the riksbank ’ s interest rate hikes. another explanation was the krona ’ s marked appreciation towards the end of 1995. in 1998 the krona weakened again in connection with the russian crisis. on a 12 - month basis the depreciation amounted at most to about 10 per cent. even so, import prices did not rise ; on the contrary, they actually fell a good way into 1999. this largely reflected the factor that triggered the crisis : one of the largest price falls in modern times in commodity markets, including a barrel price of oil down towards usd 10. the result was markedly decreased international export prices - the equivalent of our import prices. a factor that may have contributed to the exchange rate pass - through to consumer prices being smaller after the asian and russian crises is that importers turned away from traditional trading partners in the united states, for instance, in favour of countries whose currencies have not appreciated against the krona. our imports from eastern europe and southeast asia, for example, have increased markedly since 1995. it is conceivable that the krona ’ s depreciation at the time of the asian and russian crises has been exaggerated because the tcw index measures the exchange rate against the most important industrialised countries and uses weights based on export and import shares from 1989 - 90. in order to throw light on this, we have constructed a simple, broader preliminary import - weighted index that covers 44 countries. the results again show that the krona was weak in 1998 and 1999 but not as weak as the tcw index indicated. one reason why the exchange rate pass - through to consumer prices became smaller than expected may have to do with changes in the composition of imports. there are, however, also reasons for supposing that the krona ’ s direct pass - through to inflation has decreased. simple estimations indicate a marked reduction in the early 1990s, followed by some further fall ( fig. 2 ). a variety of factors may have contributed to this. • exchange rate movements, upwards or downwards, may now be perceived as a more transient phenomenon, whereas the devaluations under the fixed exchange rate regime were regarded as more permanent. if importers expect a price change to be temporary, they will no doubt be more prone to absorb the exchange rate fluctuations in their profit margins. that this may have been the case is indicated by some preliminary studies. • generally increased confidence in

difficult to assess our forecasts and to compare them with those of other forecasters. nor was it easy to implement the assumption of a constant rate in a consistent manner in the forecasting process. these problems would have been aggravated when we extended our forecast horizon. the transition to the new interest rate assumption at the same time meant that the simple policy rule used to explain monetary policy had to be abandoned. this rule was easy to understand and was therefore a good educational tool : if the forecast of a constant repo rate showed inflation close to target the interest rate would be held unchanged. however, it gradually became clear that this rule could sometimes form an obstacle in our communication. it created an exaggerated focus on the current interest rate decision and on the inflation forecast exactly two years ahead. the gradual shift towards more flexible monetary policy led to a greater need to illustrate the fact that it is the entire expected sequence of events for inflation and the real economy a few years ahead that is important to monetary policy decisions, and not merely the levels we foresee two years ahead. and the focus should be on not only current interest rates, but also expectations of future interest rate changes 6. now we instead use an assumption that the policy rate will develop in line with financial market expectations. this means that the monetary policy discussion can now be based on a relatively realistic development of the interest rate throughout the forecast period. this makes it easier to assess our policy, to compare our forecasts with those of other forecasters and it enables clearer communication with regard to future policy. if inflation is expected to be close to target in a two - year perspective, this could indicate that market expectations of interest rate developments are reasonable. however, to determine this we must also take into consideration the expected sequence of events for inflation and the real economy that would result from this interest rate path. in our communications we point out that the assumption that our policy rate will follow implied forward rates is not a commitment from the riksbank that the repo rate will actually develop in this way. each time we make a decision, we take a stance on the interest rate path, on the basis of the information available at the time. our considerations can and should be altered if the economy develops in a see jansson, p., and a. vredin, ( 2004 ), ” preparing the monetary policy decision in an inflation targeting central bank : the case of sveriges riksbank ”, in the conference volume practical experience with inflation targeting,