the riksbank in its contacts with the general public and make monetary policy more transparent. analysis and debate would be concentrated on factors that monetary policy influences. this, however, presupposes the existence of an underlying yardstick that can take every conceivable transitory effect into account. such measurements are difficult to construct. specifying all the circumstances that have to be considered so as to obtain the best picture of underlying inflation and doing this in advance is not a simple matter. using underlying inflation also has the drawback that essential information about the inflation process may be overlooked. for example, changes in import prices are a part of the domestic inflation process because they affect price setting in trade. in the present state of our art, the drawbacks of changing to a measure of underlying inflation for the riksbank ’ s monetary policy are greater than the advantages. as i have indicated, however, the cpi may be markedly affected by transitory effects. it is therefore important to monitor measurements of underlying inflation that have been stable over time. the path of the underlying inflation process is an important factor in the riksbank ’ s monetary policy decisions. gradual recovery in growth terms, 1996 was weaker than 1994 and 1995. the slowdown mainly came from marked stock reductions and a contraction of public sector operations. but even the growth of final demand in the private sector tended to slacken in 1996. there are now clear signs of an economic recovery ; the volume growth of exports remains high, along with indications that a stronger increase in private consumption is on the way. what, then, will be inflation ’ s path in the years ahead? the riksbank considers that at present the swedish economy has unutilised resources and even if growth does pick up during 1997 and 1998, it is unlikely that these resources will be activated to such an extent that the inflation target is in danger. the scenario in the december inflation report involves a gradual increase in the rate of inflation in the coming years. the main explanation for this upward movement is that the transitory effects - from lower interest rates and a stronger exchange rate - which kept inflation down in 1996 will be fading. the registered rate of cpi inflation is then expected to approach inflation ’ s underlying trend, which in the years ahead is judged to be more or less in line with the inflation target. lower inflation propensity the new price and other economic information in recent months reinforces the impression that price pressure is low. to this extent, the conditions

policy is perceived as the phillips curve t h e p h illip c u r ve in f latio n * b * a u n e m p lo ym e n t in f latio n * b * c u n e m p lo ym e n t focusing primarily on the stabilisation of employment. as we have seen, people ’ s expectations play a major part in the inflation process. if people expect monetary policy to concentrate in the first place on stabilising employment, then firms and employees will not regard unduly high wage increases as all that serious because they will count on measures being taken to stimulate demand if employment is in danger. sweden in the 1970s and ’ 80s is a good illustration of the problems that may arise. wage and price increases in that period were systematically higher than in other countries, which led to recurrent cost crises and problems with competitiveness. an important reason for the lack of adjustment to wage increases in the rest of the world was that employees and firms reckoned that the government and the riksbank would ultimately bail them out with devaluations, which is what actually happened. in this way inflation expectations were adjusted in advance to an anticipated pattern of economic policy reactions, whereby high price and wage increases were accepted or accommodated by devaluing the krona. as a result, strong inflationary mechanisms were built into the economy. as we have seen in recent years, once such mechanisms have been established, they are difficult to change. 3. monetary policy ’ s rule system experience has shown that more is needed than proud declarations from political decision - makers that they will safeguard a stable value of money and are not prepared to adapt policy to excessively high wage increases. we heard plenty of that in the 1980s. one way of enhancing credibility that has been found to work well and is supported by economic theory is for the democratically elected body to delegate monetary policy to a central bank with a clear, specified obligation to safeguard the value of money. the central bank is given full control over the instruments, principally the short interest rate, for fulfilling the stipulated objective. this arrangement limits both the room for short - run attempts to boost employment and the risk of inflationary mechanisms taking root in the economy. that also lessens the risk of a repetition of what happened in the early 1990s when the inflation bubble burst and unemployment rose. credibility provides greater manoeuvrability it may be worth underscoring that a system