mr. heikensten answers eight questions on monetary policy in sweden speech by the deputy governor of the bank of sweden, mr. lars heikensten, at the economics association in umea on 19 / 2 / 98. introduction during the 1990s monetary policy has been the subject of intensive discussion. this is not surprising, given the serious crisis in the swedish economy at the beginning of the decade and the role that monetary policy played both then and as the crisis was building up. since that time, monetary policy has had an explicit role to safeguard independently the value of money – a role that is new in sweden in the post - war period. with a floating exchange rate, the decisions currently made by the riksbank on its instrumental rate are very real and important to the behaviour of households and businesses and to economic growth. the monetary policy discussion has evolved over time. questions and statements about monetary policy ’ s basic objective of price stability that were very frequent a couple of years ago are less so today. understanding of the riksbank ’ s actions seems to have increased. we are presently trying to evaluate this by asking the public how it views the riksbank ’ s work and by following the media and newsletters written by the market ’ s players. it is also possible to form an opinion based on the market ’ s reactions to changes in the instrumental rates as to whether the policy is understandable. in spite of the fact that knowledge and understanding of the riksbank ’ s policy have gradually increased, i believe that from time to time there is a need to explain the basis for the policy and some of the principles that guide it today. the purpose of today ’ s speech is just that. i will endeavour to answer seven of the questions that i have encountered most often in recent years at meetings and in editorials and commentaries and that seem to permeate the discussion of monetary policy continually. by way of conclusion i will comment on an eighth question. question 1 : why is low inflation good? the experiences of previous decades in sweden and a number of international examples show that high inflation is associated with economic costs. moreover significant costs ensue when one is compelled to gear down from high to low inflation – something that sooner or later always happens. it has been shown that high inflation is often associated with sharp fluctuations in the relative prices of goods. rapid and abrupt price changes create uncertainty about the future for all the actors in the economy. it simply becomes more difficult to make long

the same time as their borrowing requirement was increased. 8 imf ( 2016a ). 8 interest expenditure soared and the countries were forced to make drastic cuts in a number of areas of expenditure. swedish experiences also point to confidence falling rapidly and taking a long time to regain. for many years after the 1990s crisis, sweden suffered from a much higher interest rate than germany, with a very large risk premium on swedish government securities. given the swedish financial system ’ s large degree of international dependence, it is important and necessary to maintain international confidence in the financial system. a robust foreign currency reserve is, in my opinion, an important condition for this. to return to the defence forces metaphor, if other countries know that we have a number of jas fighter planes on standby, it would probably also reduce the risk of a conflict situation arising, where we would have to use them. today, there is a proposal on the table before the government that could in principle entail halving the riksbank's foreign currency reserve. 9 allowing the foreign currency reserve to decline in a situation where the banking sector as a whole and its funding in foreign currency are growing is to say the least a risky venture. this is not only my opinion and the opinion of the riksbank, it is also shared by the international monetary fund. in its article iv review of sweden's economy in 2016, the imf concluded that the foreign currency reserve should not be smaller than it is now. the european central bank, ecb, has also recently issued an opinion recommending that sweden should not reduce the size of its foreign currency reserve below the current level. 10 the foreign currency reserve should be paid for by the banks the cost – or insurance premium – of having a liquidity insurance in the form of a foreign currency reserve is at present charged to the riksbank ’ s earnings and central government finances and is calculated at around sek 400 - 500 million a year. this is, of course, a lot of money, but calculated per inhabitant per year the insurance premium is only sek 40 - 50. this corresponds to around two cups of coffee or half of a cinema ticket. moreover, it is actually a cost that could well be transferred to the banks, which are the primary beneficiaries of such an insurance. one could say – to take it to an extreme – that tax - payers currently subsidise the banks by almost half a billion a 9 the government ’ s