lars heikensten : introduction to monetary policy speech by mr lars heikensten, governor of the sveriges riksbank, at the riksdag committee on finance, stockholm, 16 october 2003. * * * let me begin by thanking you for the opportunity to come here and talk to the members of the riksdag committee on finance about monetary policy. i believe that the committee's public hearing of the riksbank governor provides a good basis for a constructive discussion of monetary policy in sweden and comprises an important part of the openness the riksbank wishes to safeguard. these open hearings began originally at the initiative of the riksbank. they were an expression of our endeavour to bring about an open discussion on monetary policy, an endeavour that has since taken on many other aspects ; lengthy inflation reports, published minutes from monetary policy meetings, press conferences where we account for our interest rate decisions and explain our deliberations, and so on. now these hearings are a part of our legislation. the fact that the committee closely follows our activities has become even more important since the riksbank was given an independent status. these hearings illustrate the clear link between us and the democratically - elected body in sweden. today i shall take up three themes. i shall begin with a few words about the riksbank's situation following the referendum. then i shall comment as usual on the assessment of inflation and the interest rate decision we have published. finally, i shall discuss the swedish economy's long - term growth prospects. the riksbank after the referendum the result of the referendum was, as we all know, a " no " vote. what this means for the riksbank is that we will continue to focus our operations on our statutory objectives ; to maintain price stability and to promote a safe and efficient payment system. quite simply, it will be " business as usual " for monetary policy. this means that under normal circumstances we will continue to follow our simple monetary policy rule : if future inflation is forecast to be higher than the inflation target of 2 per cent, we will raise the interest rate, and vice versa if inflation is forecast to be lower than 2 per cent. this clear intellectual framework makes it easier to influence expectations of monetary policy in society and to evaluate the policy afterwards. both we ourselves and external analysts can take a stand on whether the policy appears sensible in relation to the target, whether the forecasts we make are reasonable, and whether

letting the conduct of monetary policy be excessively influenced by an undue concern for the stability of asset values. it saw that the aversion to significant interest rate movements expressed at the time by the bank of canada put at risk its ability to achieve its macroeconomic objectives. in one of its more colourful phrases, the report warned that “ the authorities must not be restrained by excessive tenderness. ” 21 however, the present confidence in markets is not just a question of philosophy. since the 1960s, a variety of legislative and structural changes have made the financial sector still more resilient and flexible. this has made the transmission of monetary policy more efficient and has eliminated residual concerns about the inability of the markets to cope with the effects of central bank actions. d. concluding remarks even though the porter commission had some remarkable insights, there is no doubt that there has been a major change in views since the 1960s with respect to the objective of monetary policy and the mechanisms through which policy works. two factors stand out in trying to understand the change. the first is the simple accumulation of experience that has exposed some of the shortcomings in earlier thinking about macroeconomic policy. the second is the advances in the analytic framework available to policy - makers to help them analyze the workings of the economy and of monetary policy. these are not independent factors, of course, since economic analysis does change in response to experience. in this case, it was the inability of the previous framework to provide a satisfactory explanation of the developments in the second half of the 1960s and the 1970s that led to changes in the framework for analyzing the macroeconomy. porter commission report, pp. 477 - 478. experience of good and bad outcomes has thus played a major role in the development of views about monetary policy. the theory dominating the views of tony hampson and his colleagues was developed in response to the great depression of the 1930s. however, the views of my generation of central bankers have been coloured by the great inflation that marked our professional years. this brought back to the fore the fundamental truth about inflation being a monetary phenomenon that had become temporarily obscured in the 1950s and 1960s. i want to make sure, however, that i do not leave you with the impression that views on monetary policy are mere creatures of circumstance. our belief in the objective of price stability has a more solid foundation than that. a vast range of historical evidence as well as a large body of economic theory have long supported this objective as a necessary factor for good performance