##ed resources? another aspect of the speed limit to economic growth, at least in the short run, is the level of unutilised resources. an important component here is the extent of unutilised labour. experience shows that the stability of inflation has to do with the level of unemployment. if unemployment falls below a certain level, a stronger stimulation of production and employment ( by means of a more expansionary economic policy, for example ) simply leads to bottlenecks, shortages and rising inflation. instead of a permanently higher level of employment, the end result is a return to higher unemployment. this level of unemployment is not something that monetary policy can alter. it has to do with other factors, such as occupational and geographical mobility, the propensity to take the jobs that are available, and so on. contributions in this field can be made with other components of economic policy but not, as i said, with monetary policy. the problem we face is that unemployment ’ s critical level cannot be identified for certain and we do not know when shortages and rapid wage increases will actually arise. estimating these matters is difficult and the results cannot be taken for granted. it is therefore hard to tell how much scope there is for a temporary phase of economic growth above the long - term trend. the ability to look ahead and formulate monetary policy cautiously is particularly important when an economy is moving further and further along an upward phase. otherwise there is a risk of price and wage increases accelerating so that the brakes have to be applied more abruptly later on, leading to a situation that is worse than would otherwise have been the case. thus it is in this phase of rising activity that we can be said to influence the depth of the next slowdown. it was the overheating in the late - 1960s, the mid - 1970s and the end of the 1980s that set the stage for the subsequent deep troughs. and each recession was worse than its predecessor. looking back, it is easy to see that economic policy ought to have been tightened much earlier than was the case on those occasions. at the same time, it has tended to be difficult, not least in fiscal policy, to take such measures sufficiently early, particularly as that needs to be done before the problems are clear to everyone. that is also why pre - emptive interest rate hikes not infrequently encounter criticism from some quarters. but a central bank has a job to do and must perform its statutory functions. but neither,

lars heikensten : monetary policy and the economic situation speech by mr lars heikensten, governor of the sveriges riksbank, at handelsbanken, karlstad, 26 january 2004. * * * it is nice to meet a group of representatives of the business and social community in this way in varmland. i would therefore like to begin by thanking the organisers of today ’ s lunch meeting. when i took office as riksbank governor last year i decided that i would leave stockholm shortly before each monetary policy meeting and visit different parts of the country ; both to learn more about developments in various parts of sweden and to explain the riksbank ’ s work and actions. my visit to karlstad today is the first of these trips. during the morning, i visited the university and spoke about how the riksbank works. later this afternoon i will first be visiting coffee manufacturer lofbergs lila and thereafter be discussing labour market conditions at the county administrative board. we at the riksbank make these visits in order to meet the swedish people and increase understanding for our policy, something that is particularly important today given our statutory independence. in sweden we have an inflation target, which the riksbank has defined as 2 per cent with a tolerance interval of plus / minus one percentage point. as i see it, our policy of inflation targeting has worked well. we managed to gain respect for our conduct of monetary policy a lot quicker than many other countries. moreover, in the ten years that have passed since the introduction of the new regime, average inflation has been very close to our target. at the same time, growth has been higher than in previous decades. prospective inflation has also been remarkably stable for the past 6 - 7 years despite periods of rather large transitory fluctuations in actual inflation. the stable inflation expectations have been particularly important for wage negotiations, which have been able to proceed against a completely different, more secure background than during the 1970s and 1980s. when we conduct monetary policy, we do so on the basis of forecasts of inflation for primarily the coming 1 - 2 years. the reason we work with this time perspective is that the effects of our actions are exerted mainly during this horizon. when our forecasts indicate that inflation in the relevant time horizon will be above target, there is normally reason to raise the repo rate, and vice versa. particularly when it comes to debate situations such as that we have been involved in recently, it