deficits. the dollar could then drop considerably in value and there would be a risk of considerably poorer growth. the current account deficit is large – almost 5 % of gdp – and particularly large in relation to the united state ’ s limited foreign trade. in my opinion, american analysts who in general have a very optimistic view of a very short downturn underrate these risks. what effect will the american economy have on the swedish economy? the question is also what effect developments in the american economy will have. if you look just at the effects on trade flows, the effect on europe and sweden is not so strong. exports to the united states only account for a bit more than 2 per cent of our gdp and the american market has about the same importance for the euro area. in addition, we are affected by demand for swedish goods from other countries reducing when their export to the united states drops. moreover, some international companies with activities in the united states can affect household wealth in europe as well through share prices – this applies not least to sweden. our “ swedish ” companies are very international ( ericsson, electrolux, stora - enso, volvo, atlas copco, skanska ) at the same time as a large part of swedish households ’ shareholding is invested there. what conclusions should we draw then for the swedish economy? i would like to begin by reminding that the swedish economy is better equipped than for a very long time as regards the underlying climate for growth. we have sound and stable public finances. we have paid off our foreign debt after a number of years with a current account surplus. inflation expectations are stable and unemployment has been considerably reduced ( see diagram 2 ). deregulations have also led to increased competition in many areas. the labour market also seems to operate more flexibly than before. financial savings in different sectors in sweden, per cent of gdp per cent private sec tor - 2 c urrent acc ount - 4 - 6 public s ector - 8 - 10 - 12 - 14 198 0 198 1 19 82 198 7 198 8 19 89 199 5 199 6 and it is considered that there is considerable potential for growth with regard to making use of it development. this is perhaps more true for sweden than for the us economy. in the it sphere, sweden is a long way forward although to date development has not affected productivity in the whole of the business sector to the same extent as in the united states. neither have we seen such a strong growth

the inflation target. however, the riksbank has a pedagogical and practical problem. monetary policy decisions are based on assessments of inflation a couple of years ahead and are focused on achieving the inflation target during that period. this means that we can often be compelled to increase the interest rate despite the actual rate of inflation at the time being under the target. in december last year, for instance, the riksbank increased interest by 25 points despite inflation then being at 1. 4 per cent. decisions are then made on the basis of forecasts over a two - year horizon. the most important reason for not waiting until inflation actually exceeds the target is that inflation expectations would then risk accelerating since it takes up to two years before monetary policy has its full effect. and then we may – to rein in inflationary expectations again – be compelled to tighten up the economy more than we would have to have done if we had reacted earlier. the riksbank ’ s way of conducting monetary policy obviously plays an important role with regard to maintaining confidence in price stability. however, we should not forget that fiscal policy also has to be conducted in a way compatible with the price stability target. the budget consolidation, the government ’ s expenditure ceiling and balance targets have strongly contributed to achieving credibility in the price stability objective. it is was first when the budget consolidation in the mid - 1990s had come quite a long way and optimism on the swedish economy began to return that inflation expectations showed that the price stability objective had attained credibility. the riksbank did not then need to counteract high inflation expectations by monetary policy. the united states important for future growth inflation has not just been kept down by the fact that there have been a lot of unused resources until now and that inflation expectations have stabilised at a low level – we have also been aided the pressure on prices from deregulations and increased competition. however, it is no longer probable that this process will pull down inflation to the same extent in future. some dampening of the rate of growth in coming years is therefore probably necessary if we are to avoid tendencies to overheating. this dampening can be achieved either by a more stringent monetary policy or by the economy dampening by itself. it now looks as if a slackening of the cycle is on its way led by developments in the united states. however, the strength and duration of this downturn is uncertain and depends among other things on future cyclical development in the united states and the