policy realignment coincided with a profound economic crisis. output fell around 5 per cent over a three - year period, open unemployment shot up to over 9 per cent and total unemployment to around 13 per cent, figures that had been completely unknown in modern sweden. the government finances deteriorated sharply and budget deficit reached a high of more than 12 per cent of gdp, which was almost without precedent in the industrialised countries. in the middle of this crisis, moreover, virtually the whole of the banking system was threatening to collapse. in the light of the crisis in the east asian economies, all this sounds very familiar. researchers will no doubt be studying whether this dramatic setback in the swedish economy could have been managed differently. some things could definitely have been arranged in another way both in the late 1980s and once the crisis was over us in the early nineties. but the vital conclusion is, i believe, that the roots of the profound crisis stretched a long way into the past. an economic policy realignment was essential ; a credible stability oriented policy had been lacking ever since the collapse of the bretton woods system in the early 1970s. it was high time to put this right. making the new regime credible after the long period of high inflation, together with extensive economic problems and massive government deficits, the task of inspiring confidence in economic policy ’ s new direction proved difficult at first. economic agents listened to the new approach with doubts and hesitation. as we know from other countries, however, creating confidence in a new regime with low inflation is a rather long process that takes time. moreover, if the work of keeping inflation low and government finances in order is to be combined with low interest rates and stable growth, it is a task that never ends. in recent years the low - inflation regime has gained increased credibility. besides a disciplined monetary policy for price stability, a major contribution to this has come from the consolidation of government finances. in just a few years a budget deficit at 12 per cent of gdp has been turned into today ’ s surplus. in order to underscore its ambitions for public finances, the government has a long - term objective : as the average level over a business cycle, government finances are to generate a surplus at 2 per cent of gdp. a surplus will make it possible to reduce public debt so that future challenges which the swedish economy may encounter can be accepted without leading to problems for government finances. considering the public debt that has accumulated in the 1990s and the fact that government finances in sweden

institutions. the buffer has been reset to 0 % and will remain there for at least the next two years. lifting the countercyclical capital buffer requirement will make it easier for the banking system to support households and businesses by creating the scope for new lending in an amount ranging up to 350 b. kr., or 12. 5 % of the current loan portfolio, all else being equal. moreover, it was decided this past sunday, at an extraordinary meeting of the monetary policy committee, to begin direct purchases of treasury bonds in the secondary market. this will both support fiscal policy and ensure that lower interest rates are transmitted out the entire yield curve, thereby lowering households ’ and businesses ’ financing costs, which is the bank ’ s objective. honoured guests : in iceland ’ s campaign for independence, currency issues were never mentioned. it was automatically assumed that iceland would continue to participate in the nordic currency union as an independent member, as the norwegians had done after separating from sweden in 1905. participation in nordic currency cooperation was actually written into the agreement made when iceland was granted sovereignty in 1918. this currency cooperation was based on the gold standard, as were most of the world ’ s currencies at that time. however, the nordic currency union fell apart during the post - war years, and icelanders were forced to rely on themselves as they endured the shocks that pummelled the country during its first years of sovereignty. and we ’ ve been on our own ever since. iceland has a number of unique characteristics that complicate economic policy. the economy is extremely small. its export sectors are homogeneous and prone to cyclical fluctuations. most of its financial markets are relatively shallow and illiquid, which complicates price formation. not only is our currency small, it is also bordered on both sides by two of the largest currency areas in the world – which cannot but make independent monetary policy conduct more difficult. and there are other factors as well. icelanders demonstrate a decided herd mentality in their consumption decisions, which causes wide fluctuations in private consumption. with its small population, iceland has a limited number of workers to do all that is needed – operate the healthcare, education, and administrative systems – and conduct monetary policy as well. anyone discussing iceland ’ s monetary policy concerns is bound to acknowledge these problems. on the other hand, it is clear that the greatest problems facing domestic monetary policy do not stem from the structural flaws inherent in iceland ’ s history and geographical characteristics – flaws