kristina persson : sweden, emu and the krona speech by ms kristina persson, deputy governor of the sveriges riksbank, at a seminar at svensk handel, stockholm, 16 november 2001. * * * thank you for the invitation to come here. the theme is an important one, even if we do not yet know when a referendum will be held and whether a decision on emu membership will be taken in sweden. there is now just over one month left until 1 january 2002, when 307 million inhabitants of 12 european countries will have the same new banknotes and coins. 15 billion banknotes and 50 billion coins will come into circulation. in the course of a couple of months the national banknotes and coins in the eurozone will cease to be legal tender. the distribution and exchange will involve enormous challenges in terms of practical implementation, logistics and security. yet i should imagine that many people will soon see it as a positive experience to be able to use the same means of payment throughout almost the whole of western europe. seeing the banknotes and shopping in euro prices across the continent brings home the existence of the monetary union in a more tangible way for the citizens of europe. for us swedes the euro will enforce our sense of being outside the euro. in addition, we have behind us a period during which the krona has weakened without this being apparent entirely motivated by fundamental factors. in my opinion, these are problems that are worth a closer examination. it is on these issues that i intend to speak today. the role of the riksbank the role of the riksbank in this context is to implement the decision taken by the government and parliament. the sveriges riksbank act, which has governed our operations since 1999, states that “ the riksbank shall decide on the application of the foreign exchange rate system decided upon by the government. ” the general council of the riksbank last expressed an opinion on the issue in 1997 when asked to respond to the government's investigative report. in its response to the submission the general council emphasised that the economic advantages of a membership probably outweighed the disadvantages and that sweden therefore should join the emu from the start. the current executive board has not had reason to take a stance on the issue. over the past few years we have regularly made technical preparations to enable a possible future membership to be implemented at no great cost and in a problem - free manner if and when a decision is

: greater attention to inflation? in norway inflation has been low and stable for a long period, until recently. inflation expectations, as we measure them, have been close to the inflation target. short - term fluctuations in inflation have had little impact on inflation expectations ahead. since winter, inflation expectations have increased, particularly one - year - ahead expectations. inflation has also attracted substantial media attention. in 2003, a theory called rational inattention was advanced by the nobel laureate christopher a. sims. [ 13 ] in periods of low and stable inflation, it may be rational not to pay much attention to inflation and it would be reasonable to assume that inflation remains relatively constant. once inflation reaches a high level, agents start paying attention to it and find it worthwhile to spend time and resources on factoring future inflation into their economic decisions. if economic agents expect high inflation to persist, the high inflation numbers may become a source of persistently high inflation. both inflation and inflation expectations become entrenched at a higher level, and it becomes more difficult to bring inflation down. chart : from one expectations regime to another this can also be illustrated in a model exercise. we again look at a cost shock. in the model exercises i showed earlier, expectations formation remained unchanged even when inflation surged. both firms and households have assumed that inflation will move down relatively quickly. the effects in the standard model are represented by the dark blue lines. in the scenario shown by the light blue lines, we introduce the possibility of a more persistent change in inflation expectations when inflation becomes high. [ 15 ] here households and firms pay more attention to the inflation numbers and assume that inflation will remain persistently high. the cost shock propagates, and inflation continues to move up. a stronger and prolonged period of monetary policy tightening is then required to bring down inflation. the real economic costs associated with high inflation increase. chart : concluding slide conclusion let me conclude. norges bank is charged with ensuring low and stable inflation. inflation has surged to a high level over a short period. our task is to bring it down again. wage - price spirals have not been a theme in norway or among our closest trading partners for a long time. one of the lessons learned from the great inflation of the 1970s and 1980s is the importance of firmly anchored inflation expectations. many countries experienced a period of high unemployment before inflation was brought under control, and inflation expectations fell. we do not believe that there is an imminent danger of a wage - price spiral