irma rosenberg : monetary policy and the labour market speech by ms irma rosenberg, first deputy governor of the sveriges riksbank, at simra, stockholm, 22 may 2007. * * * introduction thank you for the invitation to come here! after the economic crisis and the changeover in economic policy at the beginning of the 1990s, the swedish economy has functioned much better than anyone could have imagined. gdp growth has been higher than in the 1970s and 1980s, inflation has been low and more stable and real wages have increased much more quickly than during both of the previous decades. however, developments in the labour market have not been as favourable. unemployment rose tangibly in connection with the crisis in the 1990s and has since then remained at a higher average level than before. inflation has on average been slightly lower than the riksbank ’ s inflation target since it was introduced in 1985. during the years 2004 - 2005 inflation was noticeably below the target. it may therefore be relevant to claim that the high unemployment is largely due to incorrectly balanced monetary policy. there are also debaters who have implied that an economic policy that aims at low inflation can in itself contribute to unemployment being higher than necessary. i intend to devote my speech today to explaining my views on this. i also intend to briefly comment on how i viewed the current situation in the labour market in connection with the monetary policy meeting in may and what significance this had for my stance at the meeting. however, i will not give any new monetary policy signals. but first i shall begin by providing some historical perspective on this issue by giving an account of the background to the economic policy change of regime at the beginning of the 1990s. from fine - tuning stabilisation policy to " stable game rules ” unemployment is currently high in comparison with the levels that prevailed during the 1970s and 1980s. open unemployment at that time varied between 1. 5 and 3. 5 per cent. in the mid - 1990s open unemployment went up to just over 8 per cent, while during recent years it has varied between 4 and 6 per cent. however, the factors that contributed to holding down unemployment during earlier decades at the same time contributed to the economic crisis at the beginning of the 1990s and also to the need for an economic policy change of regime. from the 1950s up to the mid - 1970s the authorities in sweden attempted to conduct what is usually known as fine - tuning stabilisation policy. this involved trying to parry fluctuations in economic activity with an active fiscal policy

extremely complex financial products, along with other debt securities and sold to insurers and investors. these securities, known as “ cdos ”, developed exponentially in the 1990s and 2000s, and came to represent colossal sums on the balance sheets of many financial institutions worldwide. these instruments were intended to disperse credit risk. but when the value of the underlying subprime loans bis central bankers ’ speeches collapsed in 2006 / 2007, it became clear, on the one hand, that the risk had not disappeared and, on the other, that by increasingly dispersing this risk, it was everywhere. this was the crux of the first episode of the crisis. investors then realised that these products were opaque and toxic and they became distrustful. the collapse of a number of hedge funds in summer 2007 as a result of these products led to a freeze in interbank markets and banks stopped lending to each other. in september 2008, these dynamics and the attendant loss of confidence culminated in the folding of the major us investment bank lehman brothers. the seizing up of the interbank market and the magnitude of the shock for banks was even greater and had an immediate impact on the real economy. lending to the economy declined, investments and international trade collapsed and all regions of the world went into recession at the end of 2008. this is a brief recap of the first leg of the crisis. you can see that at the outset it was a real estate and financial crisis whose epicentre was in the united states. epicentre no. 2 : since 2009, the euro area but how did this first crisis transform into the euro area crisis that has been raging for the past two years? in two words, the answer is public debt. indeed, the financial crisis of 2008 had far - reaching consequences on the public finances of most countries : tax revenues fell due to declining activity ; welfare spending rose due to higher unemployment ; stimulus plans had to be implemented and, in many countries with the notable exception of france, the cost of rescuing the financial system was huge. government deficits in numerous countries increased and their debt exploded. as an indication, the ratio of government debt to gdp of most industrialised countries rose by over 20 points between end - 2007 and today, which is very significant. if the fiscal positions of these countries had been sound before 2007, the situation would be very different today. but most countries had large deficits and high debt levels before the crisis. creditors started to question the ability of some countries to