Monetary policy in Sweden has failed. The Riksbank’s policy has led to too low inflation and too high unemployment. The reasons for the failure are that the governor has become too powerful, contrary to the original idea of an executive board with six independent members, and that the oversight and control of the Riksbank by the Riksdag has not worked. To remedy these shortcomings, the democratic control of the Riksbank needs to be enhanced and sharpened, the Riksdag’s appointment policy for the executive board needs to be improved, and the responsibilities of the Riksbank and Finansinspektionen for monetary and macroprudential policy needs to be clarified.
The Riksbank’s monetary policy has the last few years led to inflation much below the target and unemployment much above a long-run sustainable rate. Thereby the Riksbank has not only neglected the inflation target, but also the primary objective of Swedish economic policy, full employment. This in spite of the preparatory works of the Riksbank Act stating that, as an authority under the Riksdag (the Swedish parliament), the Riksbank, without prejudice to the price-stability objective, shall support the goals of the general economic policy with the purpose of achieving sustainable growth and high employment.
The Riksbank has defended itself by maintaining that a lower policy rate would increase household indebtedness and thereby increase the risk of a future crisis with even higher unemployment. But according to the calculations recently published by the Riksbank, the policy rate has a very small, if any effect on indebtedness, and therefore it has an insignificant effect on any such risk. Furthermore, the low inflation has in effect increased households’ real debt burden and therefore, if anything, increased any risks.
Monetary policy in Sweden has been delegated to an independent central bank. The purpose of the delegation is to better achieve the democratically determined goals for monetary policy. I have myself supported and proposed such central-bank independence. Why has it not worked as I and many others thought and hoped? How can one make sure that the Riksbank in the future better achieves its goals? These are questions that I try to answer here (and in longer article in Swedish in the journal Ekonomisk debatt).
There is a unique ban on giving instructions to the Riksbank. No public authority may determine how the Riksbank shall decide in matters of monetary policy. This is an important part of the independence. But the ban on giving instructions must not prevent criticism of the Riksbank if it does not fulfill the goals for monetary policy. For the sole purpose of the ban is that the Riksbank shall better fulfill the goals. The ban must not imply that the Riksdag and the government shall quietly tolerate that the Riksbank deviates from its goals.
What are then the reasons for the failure of the Riksbank’s monetary policy? I would argue that there are two contributing reasons. The first is that the original idea of the executive board, that six independent members will make better decision than a single decision-maker, has been set aside. Instead, too much power has been concentrated in the hands of the governor.
An important step towards such a concentration of power was taken before the appointment of two new board members starting their terms in January 2012. Before that appointment, the chairman of the General council, the Riksdag committee that appoints the board members, stated that the new board members should side with the monetary-policy view of the previous majority of the board. This in practice meant supporting the governor. Such a behavior by the chairman misses the whole point of having six independent board members. By interfering with monetary policy, it also seems to violate the ban on instructions. The allocation of responsibilities and the decision procedures within the Riksbank have also developed in a direction that gives the governor a position that does not correspond to just being one of six equal board members.
The other contributing reason is that the Riksdag’s supervision and control of the Riksbank has not worked. The Riksdag’s Finance Committee organizes hearings of the governor and other board members, but they follow a limiting routine, without time and possibility for follow-up questions. The Finance Committee has asked foreign experts to evaluate the Riksbank’s policy, but the last such evaluation focused mostly on the crisis management during 2008-2009 and was rather inconclusive about monetary policy. The two experts even said in their report that they did not consider it as their task to scrutinize the different arguments that board members hade put forward, arguments that were extensively reported in the minutes from the monetary-policy meetings.
In order to avoid this these problems of the Riksbank’s monetary policy in the future, the General Council’s board-appointment policy must be improved, and the democratic control of the Riksbank be strengthened.
The Riksdag and the General Council should make sure that Riksbank governance works as intended, and that the purpose of a board with six independent members is fulfilled. Here it is crucial that the Riksdag, to start with, makes clear when it appoints members to the General Council that their job includes to safeguard and promote both the independence of the board members and the mandate of the Riksbank.
The democratic supervision and control can be enhanced in several ways. The thorough regular review of fiscal policy by the Fiscal Policy Council can serve as a model. The Council could, as has been proposed previously, receive additional resources and an expanded mandate to also review monetary policy. The Council could also be moved to the Riksdag. Alternatively, or in parallel, the National Institute for Economic Research, which already reports on monetary policy in its regular business-cycle reports, could get a more explicit task to evaluate monetary policy in an annual report. An enhanced control of the Riksbank should also ensure that the Riksbank also supports the goal of full employment, a goal that is often forgotten.
The Finance Committee could use more expert help in its hearings with the executive board members, organize hearings with independent experts, and organize a regular conference on monetary policy in Sweden.
Finally, how should monetary policy and policy for financial stability (macroprudential policy) be coordinated? Who should decide if monetary policy in some situation is needed to counter threats to financial stability?
In Sweden, Finansinspektionen (FI, the Swedish FSA) has the main responsibility for financial stability and controls all the macroprudential tools. Therefore it makes sense that it is FI, not the Riksbank, that judges whether a threat to financial stability has materialized that FI cannot manage with its own tools and whether monetary policy may need to be directed towards countering that threat. (This is similar to the system in the UK.) In that case, FI can warn about this in the new Financial Stability Council. After such a warning, it would be up to the Riksbank to decide how this might affect monetary policy. This way, the ban on instructions is not violated. But absent such a warning, the Riksbank would not have any excuse for deviating from the monetary-policy goals.
Such a system for coordinating monetary policy and financial stability would clarify the responsibilities and improve the accountability of the two authorities. This in turn should contribute to better achievement of the goals both for monetary policy and macroprudential policy.