mr. backstrom discusses monetary policy and unemployment in sweden speech by the governor of the bank of sweden, mr. urban backstrom, before the swedish economics association on 6 / 3 / 97. first a word of thanks for the invitation to this evening ’ s discussion. this is the third year in succession that your association ’ s agenda has featured monetary policy. my first introductory talk, in 1995, was about the importance of low inflation and the background to and implications of focusing on price stability. last year i took up matters to do with monetary policy ’ s construction and effects, as well as the considerations behind the monetary policy decisions in recent years. this evening i shall be elaborating on those discussions and then deal with monetary policy in the context of sweden ’ s high unemployment. economic developments in sweden following the deep recession in the swedish economy in the early 1990s, we are now in the fourth year of economic expansion. since 1994 production ’ s annual growth rate has averaged 2. 8 per cent, which is considerably above the trend to which we have been accustomed in recent decades. in 1994 and 1995 the gdp growth rate averaged as much as 3. 5 per cent. this increase was concentrated on the internationally oriented sector and industrial activity registered the fastest upswing in a long time. this led to capacity problems despite relatively high investment growth. the strong expansion was therefore not sustainable. moreover, the credibility of economic policy was impaired by weak central government finance and an unfavourable history of inflation. there was a lack of confidence that the expansionary trend could continue without generating higher inflation. inflation expectations moved up - - more and more people began to count on rising inflation. all this was manifested in, for example, rising long - term interest rates, a weak exchange rate, rising producer prices and accelerating wage increases. the riksbank therefore tightened interest rate policy, beginning in august 1994. the restrictive turn was criticised in some quarters because inflation had not yet started to accelerate. but our intention was precisely that. if monetary policy measures are taken in time, the inflationary process can be checked before it has taken off. once inflation has got going, more pronounced monetary policy measures are needed for a return to low inflation. vigorous efforts have also been made over these years to tackle the central government financial deficit. with its six - monthly control stations, the convergence programme enables people to keep an eye on the political system ’ s determination to complete the consolidation of the budget and fulfil the goal

of warning. while harmonisation that is achieved through regulations can promote competitiveness in the short term, it can also cause concern in the slightly longer term. when all participants have to follow the joint regulations, it makes competition in the dynamic sense more difficult. this is not the idea behind the lamfalussy process. we often forget that regulations may also need to be subject to competition in order to become efficient. as the directives produced by the eu are often compromises between views expressed by different countries, it is not certain that the final result will be the most efficient solution for the securities markets. if the eu wants to promote competitive economies, it must also ensure that this does not result in a competitive advantage based on more or less explicit subsidies. the best way to build up competitiveness is by creating environments for competition. it is only then that the economies will become efficient. competitiveness in itself is not the goal ; efficiency is. some issues for the future in this speech i have pointed out some long - term developments that affect the future of the securities markets. unfortunately, they give rise to more questions than answers. i would like to conclude with a few questions you can ponder. in recent years, inflation in many countries has fallen, and inflation expectations have stabilised at a level that reflects the monetary policy targets. this can reasonably be said to have reduced the uncertainty in the financial markets caused by fluctuating prices. interest rates have also fallen and this, combined with reduced uncertainty over price trends, has increased households ’ incentives for borrowing. it has affected house prices, but may also affect other asset prices. at the same time, it strengthens institutional investors ’ search for yield. does this mean that the risks in the financial system will increase and make it easier for exaggerated speculation, such as the it bubble in the stock market, to develop? earlier, i drew the conclusion that demographic changes will increase the need for long - term saving. this need is reinforced by the transition from allocation - based pension systems to systems that are based to a greater extent on premium reserves. in addition, the indications are that individuals will need to take greater responsibility for their own pensions. all in all, this should lead to a larger percentage of savings being channelled through the securities markets. how will the markets be able to meet this need? are new products required, for instance, bonds with a much longer time to maturity, to manage the assets side of the life insurance companies? one of my