changing the interest rate, the riksbank can affect actual output growth in the short term but not the potential, long - term growth rate. monetary policy can possibly indirectly lay the foundation for good growth in the long term by ensuring that our payment and price - setting system functions in an efficient and confidence - inspiring manner. what determines long - term growth? as you understand from what i have said this far, it is important for the riksbank to make a good assessment of the swedish economy ’ s potential growth capacity in order to conduct successful monetary policy. we therefore return to this issue fairly often in, for instance, our inflation reports. one difficulty is that potential output and potential growth cannot be observed directly in the same way as actual gdp and employment. instead, the measure must be estimated using statistical methods and there are a number of these, each with its own advantages and disadvantages. in other words, there are several different ways of drawing the orange line in figure 1, and the different methods have demonstrated fairly differing results. the riksbank therefore uses several different methods of calculating the output gap. we also supplement our analysis with a number of other indicators of resource utilisation in the economy. as i mentioned earlier, long - term sustainable growth in the economy is determined partly by technological developments in society. this means that production per hour worked shows an increasing trend over time and thus is one of the more important contributions to long - term growth. but long - term changes in the factors of production can also affect potential growth. if we measure the labour force ’ s contribution to production in the number of hours worked, one can express it simply as our long - term growth potential depending on how much we work and how productive we are. however, it is important to point out that it is the more long - term developments in productivity growth and the change in labour contributions that are significant in this context. i mentioned earlier that different methods of estimating potential growth can give quite different results. one of the reasons is that it is difficult to distinguish the more long - term sustainable trend from temporary developments. it is of course no easy task to determine whether a change is permanent when we receive new statistics on economic developments. however, it appears that this can even be difficult to determine afterwards, when studying the historical trend. as i intend to illustrate, this applies to both productivity and labour supply. so, allow me to proceed to look more closely at the determining factors behind long - term growth and

, problems arise if the economy grows at a more rapid rate than that allowed by potential growth over a longer period of time. then production resources become strained, bottlenecks arise and tendencies appear towards overheating. in this way, potential growth for the economy can be likened to a recommended speed from which it is important not to deviate for too long a period. it is in this short - term perspective that monetary policy can play a role in influencing growth. as the output gap reflects the demand pressure in the economy and the demand pressure in turn affects inflation, monetary policy is largely about choosing an interest rate that will make the output gap as small as possible. if actual and potential output coincide so that the output gap is closed, inflation is in line with the riksbank ’ s target of 2 per cent, assuming that there is confidence in the policy conducted. this means at the same time that the size of potential growth affects the scope for conducting monetary policy. the higher the long - term sustainable growth rate, the higher the actual growth rate can be without resource utilisation becoming so high that inflation takes off and the riksbank is forced to intervene to subdue demand. this reasoning is of necessity somewhat simplified. in actual fact, temporary shocks to inflation can occur that lead to inflation not being on target, despite the fact that actual and potential output are at the same level. however, in this case, inflation is in practice probably close to the target, so a more realistic description is therefore that the target on average is met when the output gap is closed. moreover, monetary policy affects demand with some lag. consequently, the riksbank adjusts the interest rate in accordance with forecasts of inflation a couple of years ahead. during this period shocks can of course occur in the economy that couldn ’ t be foreseen at the time of the forecast. we therefore attempt to avoid excessive fluctuations in the economy by gradually bringing inflation back towards the target. thus, in the short term, the riksbank can affect output and employment by adjusting the interest rate, thereby stimulating or cooling down economic activity. but in the long run, attempts, for example, to make the economy grow faster than its long - term sustainable rate would only result in higher inflation without any change in output or employment. as i mentioned, the economy ’ s long - term capacity is limited by the size of the factors of production and their productivity. these factors cannot be governed by monetary policy. by