[English translation of a new Ekonomistas post (in Swedish).]

At the latest monetary-policy meeting, Governor Stefan Ingves and First Deputy Governor Kerstin af Jochnick dissented and entered a reservation against the decision to lower the policy rate to 0,25 percent and against the policy-rate path in the Monetary Policy Report. They obviously thought that their preferred policy-rate path would imply a less expansionary monetary policy than the majority’s path. But their path instead actually seems to imply a more expansionary monetary policy, since it apparently implies a lower average policy rate during the forecasting period. Ingves and af Jochnick “advocated cutting the repo rate by 0.25 percentage points to 0.5 per cent and a repo-rate path in which the repo rate remains at 0.5 per cent until 2016 and is slowly raised thereafter. This will also lead to the attainment of the inflation target while at the same time taking into account the risks associated with household indebtedness to some extent.”  (See the press release.)

The policy-rate path advocated by Ingves and af Jochnick is not very clearly specified. It is not as all as precisely specified as in previous dissents at policy meetings. The norm has been to specify the rate at the end of the forecasting period, but in this case this is not done neither in the press release nor in the minutes from the policy meeting. That the path advocated by Ingves and af Jochnick is not clearly specified of course make it difficult for the Riksdag’s Finance Committee and other commentators, including the external examiners Marvin Goodfriend and Mervyn King that the Finance Committed has appointed, to assess whether the path is better balanced than the majority’s path or not. An independent Riksbank is, as is well known, consistent with democracy only if its activities can be evaluated and the members of the Executive Board held accountable for achieving the democratically determined objectives. This requires that the board members clearly justify their decisions and dissents.

In figure 1, I have assumed that the path preferred by Ingves and af Jochnick is such that the policy rate stays at 0.5 percent until the first quarter of 2016 and then rises steadily, and markedly more slowly than the majority’s path, to 1.5 percent at the end of the forecasting period. I thus interpret the dissent’s “slowly raised” as the path of Ingves and af Jochnick increasing markedly more slowly than the majority’s path. That Ingves in the minutes states that the path he prefers could lead to inflation overshooting the target at the end of the forecasting period is also consistent with him preferring a path markedly below the majority’s path. But, as I show below, my conclusion holds also for paths that reach a rate closer to the majority’s path at the end of the forecasting period.

Figure 1. Repo rates and repo-rate paths.
Note: The repo rate is the Riksbank’s policy rate.

The simplest way to compare which of two policy-rate paths that, at a given policy decision, implies the more expansionary policy is to compare the area under the paths, that is, the areas between the paths and the horizontal axis (corresponding to a zero policy rate). The smaller the area, the more expansionary the policy. One can understand this by noting that a smaller area corresponds to a lower accumulated policy rate and a lower average policy-rate during a given forecasting period. In order to in this case judge which of the paths leads to the smallest area, one can compare the area A (where the path of Ingves and af Jochnick lies above the path of the majority) and the area B to the end of the forecasting period (where the path of Ingves and af Jochnick lies below). If the area B is larger than the area A, the area under the path of Ingves and af Jochnick is smaller.

In the figure it is clear that the area B is larger than the area A, with a considerable margin. If one in addition extends the paths beyond the end of the forecasting period, the difference between the areas is even larger. The difference is so large that the conclusion that the path of Ingves and af Jochnick implies a more expansionary policy is not very sensitive to how much lower their path is assumed to be relative to the majority’s path.

In order to put numbers on the difference between the paths, one can note that the average policy-rate difference is 0.23 percentage points during the 13 quarters of the forecasting period. The accumulated rate difference (the difference between the areas B and A) is then 0.75 percentage point years (= 0.23*13/4). This is quite big. It corresponds to a 0.75 percentage point lower policy rate during 4 quarters. Furthermore, if one takes into account the difference between the paths beyond the forecasting period, the accumulated rate difference is even larger.

Figure 2 shows an alternative policy-rate path, where the policy rate does not increase slower but at about the same rate as for the majority’s path and ends at 2.1 percent. Thus, it is hardly consistent with the dissent. But even in this case, the area B is larger than the area A. The accumulated rate difference is here 0.25 percentage point years. This corresponds to 0.25 percentage point lower policy rate during 4 quarters, for instance, a path that equals zero until the summer 2015 and thereafter equals the majority’s path.

Figure 2. An alternative policy-rate path.

These calculations and this reasoning are well known at the Riksbank. At the policy meetings I participated in during my time at the Riksbank, I would regularly present similar reasoning and figures of alternative policy-rate paths and corresponding yield curves and interest-rate differences (for instance, in the april 2012 minutes).

Thus, Ingves and af Jochnick apparently actually dissented in favor of a substantially more expansionary monetary policy at the latest policy meeting. But apparently they thought that their policy-rate path would imply a less expansionary policy, since they justified it by it better taking into account the risks associated with household debt (and their view is that a less expansionary monetary policy reduces the risks). The whole thing is obviously quite strange. Not least is it surprising that none of the Riksbank watchers, journalists and others, that scrutinize and comment on the Riksbank’s policy, has noted this issue and asked questions about how their dissent is consistent with basic monetary-policy relations as well as with their views on the relation between monetary policy and risks with household debt. In an almost over-explicit way, this shows that the scrutiny and assessment of Riksbank policy and communication need to be improved, as I have argued in a different context.