current, and i will return to this shortly. monetary policy, productivity and jobs one consequence of the high level of productivity is that employment has not improved very much, despite several years of good growth. it is not likely that the link between economic activity and employment has disappeared but - and this has been clear during the current economic upturn – the relationship may very well vary from one economic cycle to the next. we have produced larger quantities but using fewer employees. one possible reason for the high productivity growth is earlier investment in it, in particular. another is that the stiffer competitive pressure, which among other things originates from the internationalisation of the economy, has forced companies to make their production more efficient. this is essentially positive, as productivity gains contribute to increased income, investment and growth, which should in the long term lead to new job opportunities. there are many indications that an increasing number of companies are now approaching the limit where they can no longer meet the increase in demand without recruiting new staff. we are thus beginning to see signs of a turnaround, but the question of the labour market and the significance of monetary policy for employment remains important. to what extent can the problems in the labour market be said to be due to the riksbank having conducted an excessively tight monetary policy? if we had succeeded in predicting the high productivity we would probably have conducted a slightly more expansionary policy, but my answer is nevertheless that one is overestimating the power of monetary policy if one believes that it could have solved the problems in the labour market. a large part of unemployment is due to structural reasons and therefore does not vary according to the economic cycle. i do not believe that it would have led to so much higher consumption and investment if the repo rate had, for instance, been on average half a percentage point lower during 2002 and 2003. my assessment is thus that it would probably have led only to marginally lower unemployment. if one wishes to achieve a lasting improvement in employment, measures are required that will stimulate the functioning of the labour market in different ways and lead to investment and a good corporate climate. one reason behind the problems in the labour market is that we have not really been able to keep up with the structural change process that follows in the wake of globalisation or, expressed in another way, that we have not been quick enough in adapting to the increased pressure for change when, for instance, the manufacturing industry is challenged by low - cost countries in eastern europe and asia.

of retailers who will sell the product. this means that swedish costs, such as wages and rent paid for premises, also play a part in the price the retailer charges for the goods. naturally, the demand for the product is also an important factor. in other words, the traditional supply and demand relationship in the swedish market is important to the endprice that swedish consumers have to pay for the imported goods. there are studies indicating that domestic cost components may comprise as much as 75 per cent of the end - price. 2 arguing that the riksbank cannot affect imported inflation is therefore simplifying rather too much. on the other hand, it may be the case that during the prevailing changeover process it may be quite reasonable to allow inflation to be below ( or in a different situation, above ) the inflation target for a period of time. this lies within the boundaries of the flexible inflation targeting the riksbank conducts. a policy of flexible inflation targeting means that we always consider how large a deviation from the inflation target might be acceptable, and whether we can allow a little more time before bringing inflation back in line with the target. another challenge is the low interest rates. at present, the riksbank ’ s key rate is at an historically low level, although we are in the upturn phase of the economic cycle, at least this appears to be the case in our view of recent growth and our forecast for future growth. at the same time, one cannot rule out the possibility that inflation might remain low for a long period of time. if economic activity should burstein, ariel, martin eichenbaum, and sergio rebelo ( 2005 ), " large devaluations and the real exchange rate ", journal of political economy, vol. 113, no. 4, august 2005, pp. 742 - 784. 6 / 7 decline substantially, the problem will be that there is little scope for further stimulation using monetary policy. there is then a risk that the riksbank would lack the means to manage its stabilisation policy task. on the other hand, if we continue to have very low interest rates at the same time as the growth rate is high, there is a risk of imbalances arising in the housing market. conducting flexible monetary policy means being prepared to deal with this type of economic shock. the bank is therefore working on further clarifying the principles published in 1999 that explain how the riksbank ’ s inflation target will be applied