function. figure 3 shows the consequences, expressed as a percentage or percentage per year, of a reduction of the repo rate path by 0. 25 percentage points over four quarters on quarterly inflation, the real repo rate, the real exchange rate, four - quarter inflation, production and hours worked. the solid curves show the effect of an anticipated reduction, while the dashed curves show the effect of an unanticipated reduction. 6 we see that, all else being equal, such an anticipated reduction of the repo rate leads to an increase in inflation of just over 0. 4 percentage points, an increase in output and the output gap of just over 0. 4 per cent or percentage points, respectively, and an increase of the number of hours worked of approximately 0. 35 per cent. if employment varies one - to - one with hours worked, which is realistic in a year or a couple of years ’ time, employment will then increase by approximately 0. 35 per cent. one can also calculate the alternative forecasts for inflation and resource utilisation using so - called unexpected deviations from the main scenario ’ s repo rate path. this corresponds to a remarkable situation in which the riksbank misleadingly announces the main scenario ’ s repo rate path but plans in a later monetary policy decision to surprise the market and the economic agents by deviating from the announced repo rate path. this would be the opposite of the transparent and clear monetary policy that the riksbank says that it should conduct and does conduct. it is therefore reasonable to calculate the alternative forecasts for inflation and the real economy on the basis of expected deviations from the main scenario. the effects of expected deviations are somewhat greater than the effects of unexpected deviations. figures 2. 13 – 2. 15 in the monetary policy report are calculated using unexpected deviations. the effects of anticipated and unanticipated deviations are calculated using the methods presented in laseen and svensson ( 2009 ) and leeper and zha ( 2003 ), respectively. figure 3 the effects of expected and unexpected deviations from the repo rate path of 0. 25 percentage points over four quarters. repo rate 0, 5 1 - quarter inflation 0, 5 0, 5 0, 0 0, 0 0, 0 0, 0 - 0, 5 - 0, 5 - 0, 5 - 0, 5 real repo rate 0, 5 real exchange rate 0, 5 0, 5 1,

situation it can actually be claimed that there is no conflict. the designation “ inflation nutter ”, describing a central bank only working towards stabilising inflation, was coined in a speech held by mervyn king at a conference at gerzensee, switzerland in 1995, later published as king ( 1997 ). the designations strict and flexible inflation targeting were first introduced and defined, as far as i know, in a speech i held at a conference at the banco de portugal in 1996, later published as svensson ( 1999 ). figure 1 monetary policy alternatives, february 2010 a. alternative repo - rate paths 5. 0 4. 0 3. 0 2. 0 1. 0 0. 0 - 1. 0 d. cpif 4. 0 per cent, quarterly averages annual percentage change 3. 0 2. 0 1. 0 0. 0 b. mean squared gaps ( output ) production higher 6. 0 4. 0 main per cent - 1. 0 lower - 2. 0 - 3. 0 - 4. 0 - 5. 0 0. 20 0. 40 cpif 0. 60 0. 80 c. mean squared gaps ( hours ) 3. 0 f. hours - worked gap 2. 0 4. 0 hours 0. 0 2. 0 0. 0 0. 00 e. output gap 1. 0 8. 0 per cent 1. 0 higher 0. 0 2. 0 1. 0 - 1. 0 main - 2. 0 lower 0. 0 0. 00 - 3. 0 0. 20 0. 40 cpif 0. 60 main 0. 80 lower higher to determine which repo rate path is most appropriate, a comparison must be made of the forecast for inflation and resource utilisation for alternative repo rate paths. such a comparison is presented in figures 2. 13 – 2. 15 at the end of chapter 2 of the monetary policy report. i present a similar comparison here in figure 1. figure 1 shows the consequences of alternative repo rate paths for the forecast for inflation and resource utilisation. the different repo rate paths are shown in panel a. in the middle is the main scenario ’ s repo rate path – the repo rate path that the executive board majority chose at the meeting in february. panel d shows the equivalent forecasts for cpif inflation. 2 panels e and f show equivalent forecasts for two measures of resource utilisation, the output gap in panel e and the hours gap in panel