higher wages as compensation for expected inflation, which will have a negative effect on employment, as the scope for new recruitment will decline. monetary policy is thus unable to lastingly affect real variables such as long - term lower unemployment. but it can have a stabilising effect in the short run, particularly if inflation expectations are wellanchored so that temporary changes in inflation are not perceived as permanent. if a central bank succeeds in attaining credibility so that inflation expectations are stable, there is some scope for also taking into account developments in the real economy. the labour market : an important variable for monetary policy we thus try to conduct our monetary policy so that the inflation target is attained within a reasonable time horizon, at the same time as we emphasize that resource utilisation should approach a “ normal ” level. however, there is no generally - accepted measure for resource utilisation as there is for inflation. it is therefore necessary to use questionnaires or to try to estimate it using some statistical method. at the riksbank we use, for instance, “ gap analyses ”, where we try to relate the current situation and the forecasts for different measures of resource utilisation to the trend for the respective variable. the gap shows how far the variable is from its “ normal ” level. for instance, we use the deviation in gdp from its trend to study the gdp gap. we have two ways of measuring the gap for the labour market ; employment measured as the number of hours worked and measured as the number of persons employed. developments in the labour market thus have considerable significance for the analysis that precedes the monetary policy decision. however, all of the measures of resource utilisation we present are very uncertain, and this is why we use several different measures. 6 monetary policy decisions often concern complex deliberations. but now that the economy has undergone a period of deep crisis and it is difficult to assess what structural changes the crisis may lead to, the process becomes even more complex. one illustration of this is how one should assess future developments in the labour market. so far employment has not fallen as much as might be justified given the historical relationship between unemployment and gdp, and the large fall in gdp. this has come as a surprise to us and to other forecasters. but what conclusions should one draw with regard to the effects in the slightly longer term when the economy recovers? employment and the number of hours worked are now beginning to increase. normally, one might have expected

accompanied by new establishments. structural changes generate developments that are often referred to at present as a “ new economy ”. the marked improvement in productivity maintains profits and keeps prices down. during the transformation, a good circle is created but it is difficult to tell how long it will last. it can be described, if you like, as a period of extensive rationalisation and heightened efficiency. the growth trend is raised for an indefinite period, enabling the economy to expand more rapidly without inflation taking off. it should be born in mind that the adaptation to the new information technology does not occur automatically. it is not the case that one day we suddenly find the new technology has begun to be implemented in ways that are leaving their mark on economic developments in general. the late 19th century provides important lessons about the necessary conditions for this good circle. at the beginning of the 1800s sweden was still a poor country with an unstable form of government, a chaotic monetary system and a general shortage of credit facilities. ninety years later the swedish economy had undergone a dramatic transformation. inflation was low, with an orderly monetary system. the nation was bursting with vitality in every field. an impressive range of products, many of them world leaders, were being developed on the basis of swedish inventions. swedish financial experts were engaged in the exploitation of the inventions at an early stage. employment was provided for more and more people, living standards rose and growth was among the highest in the world. opinions about the causes of the pronounced change in the swedish economy are not completely unanimous. the stable prices presumably played a part. when inflation is low or the price level is stable, those who have to plan for the longer run face less uncertainty. another significant factor was probably the credit system ’ s development in the 1800s. banks were established and the abolition of interest controls was followed by more financial expertise. that made it possible to exploit the inventions and finance investments in the emerging industries. an increasingly stable form of government presumably contributed, too. a series of constitutional reforms provided a guarantee of stability. economic activities benefited from the abolition of trade guilds, freedom to trade and the reform of joint - stock companies. the reform of elementary education was, of course, another important step that ultimately promoted human capital. this catalogue is not intended to be a complete account of all the factors behind sweden ’ s transformation from a poor country into a rapidly expanding industrial nation. the point i want to make is that a variety of institutional changes seem to have been needed to provide a