##esian idea : we can ’ t know what the economy ’ s parameters are, and we should not view them as set in concrete anyway - they are subject to variation. one starts with some priors about what these parameters are, i. e. how the economy works. these priors are then confronted by a data sample, and the result is the posterior distribution of parameter values - that is, better - informed guesses about the way things work. as time goes by and new data become available, this working hypothesis of the economy ’ s properties and likely future behaviour is updated. while i could not say that we implement this idea rigorously quarter by quarter in practice, i find it quite appealing as a way of conceptualising both the forecasting of the economy and the conduct of policy. let us then look at two examples of forecast errors, and see what they teach us. the first chart is for year - ahead forecasts of us gdp growth, from the survey of professional forecasters. the shaded area is the range of forecasts, with the inter - quartile range - the middle 50 per cent of forecasts - in a darker colour. the average forecast is the line in the middle of this range. the forecasts are plotted forward by one year, so that they can be compared with actual year - ended growth, the blue line in the graph. for several years in the second half of the 1990s, virtually all forecasters persistently underestimated the pace of us growth. time does not permit a detailed decomposition of the errors into their various causal components. suffice to say that, as is now well - known, productivity growth in the us picked up, and so therefore did the us economy ’ s potential growth rate, at least for a period of several years. if we looked as well at forecasts of us inflation, we would find that unexpectedly high growth was not generally accompanied by unexpectedly high inflation. so strong demand growth was met with rapid supply growth. in other words, a high - level treatment of the forecasting errors points us to the productivity story. ( of course, having understood that did not make forecasters much better at predicting the 2001 recession. the ‘ new economy ’ was as prone to cyclical setbacks as the old. ) graph 2 the second chart shows some forecasts closer to home : those enunciated by the rba in the statements on monetary policy in the late 1990s. the chart shows underlying inflation as measured

per cent and cpif inflation was + 0. 4 per cent. we have been able to observe that it is a broad - based decline in inflation, to the extent that all major components are affected. 6 low inflation has come to be a widespread phenomenon and many countries and regions have recently reported inflation rates clearly below their targets. inflation has fallen particularly sharply in the euro area. the fact that this happens in a situation where there is plenty of spare capacity – which is the case in large parts of the euro area – is not particularly surprising. however, the downturn in swedish inflation is larger and has been going on for longer than in other countries. and the question is why... one possible reason, which was also discussed in an article in the latest monetary policy report in february, is that swedish companies have not been passing on their cost increases to consumers as much as is normal. 7 they have thus not increased their prices to the extent that one might expect, given the historical relationships with unit labour costs and import prices faced by producers. there may be several reasons for this, but one is that margins may decline when economic activity is weak, which is also noted in the article. current research using us data implies that price mark - ups vary positively with the business cycle. 8 another reason may be that the weak development in the euro area has hit swedish exports hard and that this has contributed to resource utilisation being lower than normal over a long period of time. with low resource utilisation one can expect that inflation will be pushed down as the pressure on wage and price increases will be low. the weak international demand is of course one factor that is beyond the riksbank ’ s control and in this sense monetary policy housing market. in the case of australia, there are no clear signs that they have faced this kind of trade - off during the period following the financial crisis. this is clearer for the period 2002 – 2004, but then inflation stayed within the target interval of 2 – 3 per cent and was only close to the lower interval limit for one quarter. see sveriges riksbank ( 2014a ). see sveriges riksbank ( 2014a ). see nekarda and ramey ( 2013 ). bis central bankers ’ speeches cannot be blamed for the low inflationary pressure. at the same time, it is the role of monetary policy to counteract this type of downward pressure to stabilise inflation around the target. monetary policy may have