developments, various international prices, for oil for example, the exchange rate, interest rates and what is happening in the domestic economy, we estimate a picture of economic activity and resource utilisation in sweden. normally it is resource utilisation that is crucial for inflation. to this we add an assessment of inflation expectations as well as estimates of factors with effects that may be more or less transitory, such as changes in interest rates and taxes. the combined result is a forecast of inflation. the large model is made up of a number of relationships, the equations for calculating exports are one example. swedish exports are estimated as a function of, for example, global economic developments and the path of the krona ’ s exchange rate or some other measure of relative prices. but as some important relationships are not particularly stable, we have to make judgements on the basis of other experiences. sometimes, moreover, there are grounds for supplementing a model - based calculation with more specific information. there may be indications that investment activity, for example, will be higher than historical relationships indicate. the information we use comes from many different sources. the bulk of it consists of official statistics from statistics sweden, the national institute of economic research and so on or their counterparts in other countries. we also take a close look at the assessments of other forecasters in sweden as well as elsewhere. in addition, we try to collected as much information as possible on our trips in sweden and abroad. i set great store by a continuous dialogue with a number of colleagues about what is happening in their parts of the world and their thoughts about monetary policy. monetary policy is obviously not a matter of applying an exact science. as our governor and i have both talked about earlier in this building, domestic inflationary pressure has been unexpectedly low in recent years, for example. the historical relationships suggested that domestic inflation would be higher. part of the explanation seems to lie in deregulations and increased international competition making prices increases in the traditional manner more difficult. there are also signs that the low and stable inflation expectations i mentioned earlier have aided us. we now believe, moreover, that resource utilisation has not been quite as high as our earlier calculations suggested. all in all, the economy seems to have been functioning more efficiently than we and most other observers expected earlier. examples of other forecasting problems are not hard to find. a highly topical issue is, for instance, how developments in stock - markets, which are now of major importance for

8 per cent basle requirement for capital. so, although nonperforming and other impaired loans amounted to 15 per cent of gdp in sweden ( a figure that is rather similar to recent estimates for korea ), the original cost to the government of rescuing the banking system amounted to only some 4 per cent of gdp ; since then, moreover, most of this has in fact been recovered. • sweden applied restrictive rules to central bank involvement in the banks. only liquidity support was provided, inter alia in the form of foreign currency deposits to stem the outflow from the banks and to reduce the risk of a credit crunch. this did not involve the riksbank in any risks because the state guarantee for banks ’ repayments also applied to us as a lender. 3. triggers now, let me turn to the actual crisis. it is well known that the event ( or events ) triggering a crisis is often different from the crisis ’ underlying causes. in the absence of a triggering factor, countries with substantial underlying problems from time to time have also been able to avoid an acute crisis. the event triggering a crisis is sometimes rather dramatic, such as the assassination of a politician - as in the mexican case - or a sudden loss of confidence, e. g. due to the presentation of a disappointingly weak fiscal budget. opinions may differ about what were the most important “ triggers ” of the acute crises we are discussing today. again, i see both differences and similarities between sweden and the asian countries. in our case, a policy shift to the low - inflation regime in the rest of europe, combined with structural changes and a more hostile international environment ( with higher interest rates and lower growth, as i mentioned before ), made the existing situation unsustainable and triggered the crisis. in the early 1990s the government refrained from accommodating the high costs and inflationary pressures that had been building up in the 1980s. under similar circumstances earlier in the 1970s and 1980s we had devalued several times. now there was broad agreement that we should stick to the fixed exchange rate in order to bring inflation down ; in this respect, the policy was indeed successful : inflation fell from 8 - 10 per cent to 2 - 3 per cent in less than two years. one effect of this, however, was that real interest rates shot up. structural reforms were also implemented, particularly in the tax system but also in housing and other areas. one aim of these reforms was to create more