New Ekonomistas post (in Swedish). Here is an English translation.
Previously, I have reported a so-called counterfactual analysis of the outcome for the Swedish economy from a policy rate from June/July 2010 of 0.25 percent instead of the Riksbank’s rate increases and higher policy-rate path. As far as can be judged, the outcome would have been much better. Inflation would have been much higher and very close to the target, and unemployment would have been much lower and closer to a reasonable long-run sustainable rate. In addition – perhaps somewhat surprising for some – the debt ratio would have been somewhat lower, not higher. This analysis has recently been criticized by Per Jansson, a member of the Riksbank’s Executive Board. But his criticism takes an unusual and unexpected form. Jansson does not question the actual calculation of the effects of a low policy-rate path, and he does not present any new and better analysis. Instead, according to his view, such a low policy rate was “simply not realistic.”
In my world, such a policy [with a policy rate of 0.25 percent from June/July 2010] is simply not realistic, and it is hence excluded as a meaningful comparison.
The new Board member Cecilia Skingsley has on Swedish Television expressed herself in similar terms. But Jansson and Skingsley are guilty of an error in their thinking, by mixing two very different ways of evaluating monetary policy.
One way, so-called ex post analysis, evaluates monetary policy after the outcome, that is, after the event. Such an analysis compares the actual policy and its outcome and target fulfillment with a counterfactual policy and its outcome and target fulfillment. It is such an ex post analysis that I have done.
The other way, so-called ex ante analysis, evaluates the policy, taking into consideration only the information available to the policymaker at the time of the decision. Such an analysis considers whether the Riksbank, given its information at the time of the decision, made reasonable forecasts of inflation, unemployment and other variables, and whether the Riksbank, given these forecasts, made the decision about the policy rate and policy-rate path that seemed to lead to the best target fulfillment. It seems to be such an ex ante analysis that Jansson (and Skingsley) are referring to. Mixing the two kinds of analysis leads to considerable confusion of the issue. Here I try to sort out the issue. It turns out that Jansson’s (and Skingsley’s) reasoning does not withstand scrutiny. Continue reading