Hjelm: Policy interaction a strength for Swedish economy
Riksbank Deputy Governor Göran Hjelm emphasized the crucial role of economic policy interaction in managing supply shocks. Speaking on May 22, 2026, Hjelm highlighted how coordinated fiscal policy and wage formation strengthen Sweden's economy.
The art of seeing through inflation
Deputy Governor Hjelm outlined his view on monetary policy responses to supply shocks, such as rising imported prices from the Middle East war or the 2022 inflation surge.
He noted that the best approach depends on the shock's scale and current economic conditions.
Two critical factors enable the Riksbank to 'see through' temporary, supply-driven inflation: clear communication and responsible fiscal policy and wage formation.
Communication must explain the shock's nature, economic effects, and why temporary inflation is acceptable.
Fiscal and wage policies must avoid increasing the risk of broad, persistent inflation.
This coordinated interaction between the Riksbank, politicians, and social partners proved effective during the high inflation years, allowing monetary policy to consider the real economy while maintaining inflation target credibility.
The Riksbank can await further information on the Middle East war's impact, thanks to high inflation target credibility and low initial inflation.
Tailoring policy to shock size
Hjelm categorized monetary policy responses to supply shocks by magnitude: small, medium, or large.
Small, short-lived shocks require no reaction.
Large shocks necessitate tightening to prevent secondary effects and a loss of inflation target credibility, despite real economic costs.
For medium shocks, crucial factors include high inflation target credibility, allowing temporary acceptance of elevated inflation via communication.
The initial state of the economy, encompassing inflation and resource utilisation, also dictates the need for tighter policy.
External factors like other central banks' policies and broad fiscal stimulus influence these trade-offs.
Sweden's wage formation, particularly the industrial benchmark, significantly impacts inflation's return to target.
Sweden's policy advantage
Hjelm's speech underscores Sweden's robust institutional frameworks as a significant advantage in managing economic turbulence.
The emphasis on clear communication and cross-policy coordination provides a credible path to navigate future supply shocks without undermining the inflation target.
This proactive approach positions the Riksbank to balance real economy considerations with price stability.