##s ex ante. a major difficulty in this analysis is that it may be unclear what is meant by stabilising the real economy. from a monetary policy perspective it is the stabilisation of resource utilisation rather than gdp growth that is relevant. this means stabilising resource utilisation around a normal level. the problem is that resource utilisation can be measured in several ways. a reasonable and commonly used measure of resource utilisation is the so - called output gap ; that is the difference between actual production and potential production. however, potential production is not a magnitude that can be observed directly – it must be estimated. there is considerable uncertainty, both theoretically and empirically, about the best way to estimate and forecast potential production. the output gap shown in the figures is the so - called hp gap, which has significant weaknesses. 7 it is important and desirable from several points of view that the riksbank and other central banks develop better and clearer measures of resource utilisation and potential production and that they publish their measurements and forecasts. such work is underway at the riksbank. assuming, however, that we nevertheless conclude that monetary policy has not been clearly inefficient in the sense that i described earlier, the next step is to focus on what combination of the stabilisation of inflation and the real economy the central bank actually selected or, in other words, which of all the possible points on the taylor curve the central bank selected. there are many different efficient monetary policy alternatives to choose between every time a monetary policy decision is made. but did the central bank make a good choice? in the event of a conflict between stabilising inflation and stabilising the real economy, did the combination chosen by the central bank represent a reasonable balance between the two? did the central bank attach reasonable importance to the stabilisation of the real economy in relation to the stabilisation of inflation? in the literature, as in the case of the forecast loss function i presented earlier, the constant that is the relative weight that the central bank gives to the stabilisation of the real economy in relation to the stabilisation of inflation is usually denoted by the greek letter lambda, λ. in figure 3, we can show the forecast loss function with the help of iso - loss curves for combinations of sums of squared inflation - gap and output - gap forecasts that generate equally large losses. such iso - loss curves are in this case downward - sloping

##ksbank fulfilling its function, the inflation target can serve as a benchmark for their decisions about prices and wages. so what effects might the new economy have in this simplified world? it could result in a more favourable path for productivity and thus a stronger expansion of potential output - a steeper path for trend growth - at least for a time. demand could then rise more rapidly without exceeding the long - term capacity ceiling and generating inflationary pressure. it is conceivable, moreover, that the new economy can lower price pressure in the economy even without an appreciable positive effect on productivity as usually measured. it is possible, for example, that internet commerce and generally stronger international competition could tend to restrain inflation by making it more difficult for firms to raise prices. that could lead to a reduction of inflation that does not have to do with the level of demand in relation to trend growth. it may be worth noting that strong competition as such does not necessarily imply lower inflation. there are many indications, on the other hand, that downward price pressure can be generated during the transition from lower to higher competition. as such a process probably takes a considerable time, the mounting competition ’ s impact on inflation will also be protracted. another consequence of the new economy - perhaps the least controversial - is the direct effect on inflation from the steep price fall for it - related products, which are not a negligible item in the cpi basket. the falling prices are explained in turn by the very strong productivity growth and high rate of innovations in this product area. the result may be what is commonly known as a positive price shock, which in many respects resembles the effects of a marked price fall for some other specific cpi component. so far i have discussed the monetary policy implications solely in terms of a notional new economy ’ s consequences for supply. new techniques and strong productivity growth leave their mark on profit expectations and capital formation, for example, and thereby add to the forces that are raising potential growth. with rising share prices, however, increased household wealth adds to demand. this raises questions to do with dynamic aspects. one risk is that demand grows faster than supply despite an improvement in potential output. that could lead to stronger price pressure and accordingly motivate a tighter monetary stance in the traditional way. another risk is that investment activity becomes unduly optimistic and leads to financial imbalances. this problem is more difficult to handle in monetary policy ’ s normal analytical framework, where undesirable