Inflation targeting and “leaning against the wind”

International Journal of Central Banking 10 (June 2014) 103-114. Revised version of comments given the 2013 IJCB conference “Inflation Targeting and Its Discontents”, September 6-7, 2013, Warsaw, hosted by Narodowy Bank Polski (National Bank of Poland).
An extended more recent version is available here.

Should inflation targeting involve some leaning against the wind? Sweden provides a case study, since the Riksbank has been leaning against the wind since 2010, stating concerns about risks associated with the household debt-to-income ratio. The cost of this policy in terms of low inflation and high unemployment is high. According to the Riksbank’s own analysis, the policy rate effect on household indebtedness is very small, and any effect on risks associated with household debt is miniscule. Indeed, much lower inflation than expected has increased households’ debt burden and, if anything, increased such risks.