this theoretical description very closely. accordingly, monetary policy decisions should be justified on the basis of a detailed quantified path for both resource utilisation and the deviation of inflation from the target. the expression “ nothing is as practical as a good theory ” probably applies in many ways, but to be really practical also requires that the theory captures the central elements as they appear in real life and – in particular – that one is aware of its shortcomings and faults. measurement and estimation problems make the step from theory to practice difficult … one circumstance that very much complicates the step from theory to practice is that while the variables in the loss function are well specified in theory, in practice it is far from obvious how they should be measured. resource utilisation, y - y *, can be regarded as a summarising measure of developments in the real economy and states how far production resources, that is, labour and real capital, are used in relation to the level that is sustainable in the long run, or the “ normal ” level. unfortunately, it is not possible to directly observe how high the level of resource utilisation in the economy is, and nor is there any generally - accepted view of how this should be calculated. it is thus scarcely possible to say that a particular policy will lead to resource utilisation increasing or decreasing by exactly this or that figure. 17 sometimes the argument is put forward that it is much easier if one uses the deviation between actual unemployment and long - run sustainable unemployment, or equilibrium unemployment, instead of resource utilisation in the loss function. but i am quite sure that svensson, lars e. o. ( 1997 ), “ inflation forecast targeting : implementing and monitoring inflation targets ”, european economic review 41, pp. 1111 – 1146 introduced this type of loss function to analyse so - called flexible inflation targeting. however, the behavioural assumption that the loss function ( or very similar variations of it ) implies, has a long tradition in analyses of monetary policy ( for example, kydland, finn e. and edward c. prescott ( 1977 ), “ rules rather than discretion : the inconsistency of optimal plans ”, journal of political economy 85, 473 – 491. ) one can also calculate the mean value of these deviations, what is known as the mean squared gap. the mean squared gap for inflation and resource utilisation can then be drawn in as points in a figure ;

, without any real mitigating circumstances. it also appears to assume that the riksbank for some reason has intentionally and systematically aimed to attain a lower inflation rate than the 2 per cent it has itself set as the target. it is difficult to see the logic in such behaviour. and it is definitely not something that i recognise after working at the riksbank at various times over the past fifteen years. wages not necessarily based on incorrect expectations there are also other objections to the criticism that monetary policy should have cost tens of thousands of jobs. one reason claimed for the unnecessarily high unemployment is that real wages, that is, wages adjusted for inflation, have been higher than they would otherwise have been if inflation had been on target. in other words, the riksbank is said to have “ tricked ” the social partners into setting wages too high in relation to the inflation that was later realised. several people have claimed that undershooting the inflation target has led to unnecessarily high unemployment. assarsson, bengt ( 2011 ), “ riksbanken maste ta sitt arbete pa storre allvar ” ( the riksbank must take its work more seriously ), debate article in the newspaper dagens nyheter, 2 may, 2011, is one example. svensson, lars e. o. ( 2012 ), “ the possible unemployment cost of average inflation below a credible target ”, unpublished article, ( http : / / people. su. se / ~ leosven / papers / phillips. pdf ), tries to quantify the number of people unnecessarily unemployed using an estimated phillips curve. his calculation method implies that the reasons for cpi inflation undershooting the target are of no importance for the effects on unemployment. it also means that average cpif inflation is unimportant in this context. bis central bankers ’ speeches however, it is far from clear what inflation expectations are used as a base for wage setting. in the long run, say five years, expectations are well anchored around the inflation target of two per cent. but in the shorter run, expectations vary more and follow actual inflation more closely. it may be that wage setting is based on the expectations in the somewhat shorter run. expectations can be measured in different ways that give slightly different results. the measure of inflation expectations that appears to have the strongest link to actual wage increases is firms ’ inflation expectations one year ahead from the