- 97 jan - 98 sources : statistics sweden and the riksbank the current crisis in asia was discussed chiefly in our risk scenarios. a small reduction in the growth of exports was made in the main forecast. but it was primarily a possible deepening of the crisis compared with the situation in december that, it was deemed, might have substantial effects on economic and price developments in sweden. thus the asian crisis was taken into account in our risk assessment. since then the crisis in asia has worsened, both in terms of its effects on the financial markets and its likely consequences for real economic growth. for sweden ’ s economy it means that the negative effects of the asian crisis probably will be somewhat more extensive and prolonged than we expected in december. all in all, the prospects for inflation from the demand side look a bit better than they did when the repo rate was last raised. another positive sign is that the wage agreements that have been concluded so far in 1998 indicate a rate of wage increases that is somewhat lower than in the main scenario described in december. however the recent weakening of the krona is a cause for concern. if it turns out to be permanent, it could affect inflation prospects. in the riksbank we are now finalising the next inflation report, in which we will present an inflation forecast reaching into the first quarter of the year 2000. there, factors such as the asian crisis, the wage negotiations and the exchange rate developments will be weighed and put into a larger context. the view of the inflation prospects that will result from this process will form the basis for future monetary policy. - 11 - inflation forecast december 1997 cpi and underlying inflation ( und1 ) 3, 5 3, 5 3, 0 3, 0 2, 5 2, 5 cp i 2, 0 2, 0 1, 5 1, 5 1, 0 1, 0 0, 5 0, 5 0, 0 0, 0 3, 5 3, 5 3, 0 3, 0 2, 5 und 1 2, 5 2, 0 2, 0 1, 5 1, 5 1, 0 1, 0 0, 5 0, 5 0, 0 0, 0 sources : statisti cs sweden and the riksbank

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