##scored, however, that if the krona ’ s weakening to date can be regarded as permanent, then there are also reasons for expecting that the weaker exchange rate will lead to inflation at a higher rate than we foresaw in the june report. that would have consequences for monetary policy, always assuming, of course, that other factors have not simultaneously contributed to a better outlook for inflation. the recent weakening of the krona, together with increased concern about continued turbulence in asia and global stock exchanges, has shown up in money market pricing. the market ’ s earlier assessment was that room existed for further interest rate cuts. today the picture is less clear - cut. this i find entirely natural in that the exchange rate is an important factor in our assessment of future inflation. the overall picture to sum up, the new statistics since june largely support the opinion about inflation prospects that we presented in the latest report. the figures for real economic activity and inflation suggest, if anything, that the path of inflation will be lower than in our main scenario in the june report. if so, however, it is presumably a question of marginal revisions. the exchange rate, however, instead of moving as we predicted, has weakened. the assessment of this tendency and how it should be weighed up with other factors in an overall assessment of inflation prospects is a matter to which the riksbank will be returning in the next inflation report on september 28th. concluding remarks having presented the riksbank ’ s picture of current economic developments, i should like to return to the somewhat longer time perspective from the beginning of this talk and take up the issue that is the theme for today ’ s speakers. is there room for expansion in the swedish economy? in doing so i shall concentrate on two fields that are closely connected with monetary policy : the functioning of the labour market and fiscal policy. the economic policy that has been implemented in recent years, with its emphasis on price stability and sound government finances, has had favourable results in a number of respects. high growth has been combined with persistently low inflation. moreover, the composition of growth has been structurally desirable, focusing on exports and industrial expansion. this helps to establish a better foundation for a sustained increase in future consumption. a reduction of external debt has begun. prospects for the coming years also look favourable. it seems that output can grow relatively rapidly by swedish standards, accompanied by relatively low inflation. there is reason to emphasise, however, that what we see is hardly the final solution

briefly, however, what is at issue is this : since nominal interest rates include compensation for inflation, these interest rates will be lower, on average, in a low - inflation economy. moreover, there is an effective lower bound for the policy rate, where the positive effects of further reductions cease and the negative ones begin to dominate. 5 this means that there is less scope for lowering the interest rate to stimulate demand in economic downturns. in addition, since expected inflation is lower, it is also more difficult to achieve as low a short - term real interest rate as would be needed to have a sufficient effect. one consequence of this that is worth noting is that, with inflation more persistently below 2 per cent, negative policy rates would become more common. those who are critical of a policy rate below zero should therefore be strong advocates for maintaining confidence in the inflation target and thus also for a monetary policy that strives to achieve the target. … which is reflected in the strategy reviews of the federal reserve and the ecb the problems of persistently too low inflation play a central role in both the ecb ’ s strategy review from july this year and the us federal reserve ’ s review from august last year. the changes that were made clearly show a wish to avoid these problems. in the justification for its new strategy, the federal reserve notes that the level of the policy rate that is compatible with maximum employment and 4 for a more detailed account, see for example, jansson ( 2020 ). 5 it is difficult to know exactly where this bound lies, but my guess is that, in sweden, it is slightly lower than – 0. 5 per cent, as the riksbank ’ s repo rate was for a period, and it probably also depends on how long the repo rate remains at negative levels. 4 long - term price stability has fallen relative to its historical average. the policy rate will therefore be limited by its lower bound more often than has been the case in previous periods. in order to anchor long - term inflation expectations at 2 per cent and prevent them from falling below this level – which would make the lower limit binding even more often – it has chosen to specify the target as an average of 2 per cent. this makes it clear that ‘ bygones ’ are not ‘ bygones ’ : if inflation has been below the target for a period, this must be compensated for by inflation then being above target for a period. 6 in turn, as i have