deficit, households will simply save the additional benefits because they expect that, sooner or later, the public sector deficit will have to be financed and this entails either increased taxes or decreased transfers. there would be no increment to demand because households strive to keep consumption stable over time. the only effect is liable to be increased uncertainty about the future. the criticism, which presupposed that economic agents are rational, also concerned the labour market. in that the phillips curve disregards a central explanatory variable – inflation expectations – it is not stable over time. a demand stimulus that pushes inflation up erodes real wage levels. employees will therefore demand compensation for the price increases and the attendant loss of purchasing power. that means that the additional employment which the stimulus was designed to generate will never materialise. moreover, keynesian economic policy had already been criticised in the 1930s on the grounds that stimulating demand in a downturn is considerably easier than tightening policy in an upswing. economic developments in sweden from the 1970s onwards provided plenty of support for keynesianism ’ s critics. inflation rose at the same time as keeping total unemployment down proved increasingly difficult. public spending expanded continuously and particularly in downward phases. government debt grew even though tax pressure rose. a fundamental loss of competitiveness was countered with repeated devaluations. back to price stability in a number of industrialised countries, economic policy was realigned in the years around 1980. the aim was to provide a good foundation for stable growth by keeping inflation low. in sweden the corresponding realignment did not occur until the turn of the 1980s. after almost two decades of high inflation, the costs were considerable. the financial excesses that had characterised the late 1980s in particular were ruthlessly exposed when the inflation bubble burst. gdp fell about 5 per cent and unemployment rocketed from levels around 2 – 3 per cent to two - digit figures. after a series of heavy attacks, the swedish krona was left to float in 1992. the fixed exchange rate regime was replaced by a return to price stability as the policy objective, now in the form of a 2 per cent inflation target. since 1999, price stability is enshrined in law and the riksbank is more independent in the pursuit of this goal. while low inflation is admittedly not an ultimate goal for economic policy in general, it is an important prerequisite for generating growth that is stable and high. history clearly demonstrates that a high and fluctuating rate of

interest rate decision in september let me move on to the stance i took at the most recent monetary policy meeting around a month ago. i, like the rest of the executive board, then voted to raise the repo rate by 0. 25 percentage points. at the same time, my assessment was that the forecast for the repo rate that we made in june still appeared reasonable. today i shall return to why i made this assessment. increased uncertainty abroad … on the whole, my view in september was that international growth was good and had not changed significantly since june. but this does not prevent the view of growth in some individual countries having changed in important respects. in september our assessment was that growth would be lower than we had expected in june, in the united states in particular, but also in europe. at the same time, developments were slightly stronger in a couple of our neighbouring countries and in several emerging markets. however, the international risk outlook had changed gradually in connection with the rising unrest in the financial markets. the change in the risk outlook largely originated in the united states. there the problems in the housing market had worsened and according to several statistics house prices in the united states fell on average, measured as an annual change. the question we asked ourselves at the september meeting was to what extent the problems would spread and slow down activity in the rest of the us economy. the unrest in the international financial markets in the wake of the us subprime crisis has also led to an increase in the price of risk, which means for instance that it has become more expensive to borrow. in this way the effects can be compared to the effects of tighter monetary policy. but apart from the changed pricing, the uncertainty has also led to greater caution in general. this also has a certain dampening effect on economic activity. in sweden, the effects of the unrest in the financial markets have been more limited than in, for instance, the united kingdom, the united states and germany. over the past weeks there appears to have been some stabilisation. but the us mortgage market may present further surprises. if, for instance, house prices were to fall more than expected, this could once again increase the unrest in the markets and lead to rising interest rates and falling stock prices, not only in the united states. in a slightly longer perspective, this can also slow down growth in the us economy and even have contagion effects in europe and the rest of the world. … but strong developments here at home