In their review of Riksbank monetary policy, Goodfriend and King make a big point of the minority (Karolina Ekholm and me) having voted for policy rates only 0.25 percentage point below the majority and use that to argue that the rate hikes 2010-2011 were “broadly accepted by all members of Executive Board.” But they fail to report that the monetary policy stance, appropriately measured, that the minority voted for was substantially more expansionary than the majority’s (not to speak of that it was only a first step of several needed in a move toward a better monetary policy). They thus fail to report the position of the minority correctly. For instance, in September 2011, the minority voted for a policy stance equivalent to a repo rate 1.5 percentage point lower the next 4 quarters than the majority’s stance. Continue reading
Marvin Goodfriend and Mervyn King presented their review of the Riksbank’s monetary policy 2010-2015 on January 19. They provide some severe and justified criticism of the majority’s policy, but they unfortunately start their evaluation by making two serious mistakes, which are discussed in this post. Continue reading
“Cost-Benefit Analysis of Leaning Against the Wind : Are Costs Larger Also with Less Effective Macroprudential Policy?” revised January 2017. CEPR Discussion Paper DP11739 (Jan 2017), NBER Working Paper No. 21902 (Jan 2017). Previous versions: IMF Working Paper WP/16/3, January 2016.
“Leaning against the wind” (LAW) with a higher monetary policy interest rate may have benefits in terms of lower real debt growth and associated lower probability of a financial crisis but has costs in terms of higher unemployment and lower inflation, importantly including a higher cost of a crisis when the economy is weaker. For existing empirical estimates, costs exceed benefits by a substantial margin, even if monetary policy is nonneutral and permanently affects real debt. Somewhat surprisingly, less effective macroprudential policy, and generally a credit boom, with resulting higher probability, severity, or duration of a crisis, increases costs of LAW more than benefits, thus further strengthening the strong case against LAW.