Category Archives: Articles

Leaning Against the Wind: Costs and Benefits, Effects on Debt, Leaning in DSGE Models, and a Framework for Comparison of Results

Leaning Against the Wind: Costs and Benefits, Effects on Debt, Leaning in DSGE Models, and a Framework for Comparison of Results,” International Journal of Central Banking 13 (September 2017) 385-408. CEPR DP 12226, NBER WP 23745.

Abstract:

The simple and transparent framework for cost-benefit analysis of leaning against the wind (LAW) in Svensson (JME 2017) and its main result are summarized. The analysis of the policy-rate effects on debt in Bauer and Granziera (IJCB 2017) does not seem to contradict that the effects may be small and of either sign. The analysis of LAW in DSGE models is complicated and the results of Gerdrup et al. (IJCB 2017) may not be robust. The Svensson (JME 2017) framework may allow comparison and evaluation of old and new approaches and their results. As an example, it is shown that these three papers result in very different marginal costs of LAW and that a realistic policy-rate effect on unemployment is crucial.

JEL Codes: E52, E58, G01

New publication: “Cost-Benefit Analysis of Leaning Against the Wind”

Update, August 2017: “Cost-Benefit Analysis of Leaning Against the Wind,” published in Journal of Monetary Economics 90 (2017) 193-213.

The first version, under the title “Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy?”, was published as IMF Working Paper WP/16/3, January 2016.

New revision: “Cost-Benefit Analysis of Leaning Against the Wind”

Update, August 2017: “Cost-Benefit Analysis of Leaning Against the Wind,” published in Journal of Monetary Economics 90 (2017) 193-213.

The first version, under the title “Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy?”, was published as IMF Working Paper WP/16/3, January 2016.

Cost-Benefit Analysis of Leaning Against the Wind

Cost-Benefit Analysis of Leaning Against the Wind,” Journal of Monetary Economics 90 (2017) 193-213. CEPR Discussion Paper DP11739, NBER Working Paper No. 21902. A previous version, with the longer title “Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy?”, was published as IMF Working Paper WP/16/3, January 2016.

Link to published version (Science Direct)

Data and Matlab program

Vox Column

Abstract:

A simple and transparent framework for cost-benefit analysis of “leaning against the wind” (LAW), that is, tighter monetary policy for financial-stability purposes, is presented. LAW has an obvious cost in the form of a weaker economy if no crisis occurs and possible benefits in the form of a lower probability and smaller magnitude of (financial) crises. A second cost—less obvious, overlooked by previous literature, but higher—is a weaker economy if a crisis occurs. For representative empirical benchmark estimates and reasonable assumptions the result is that the costs of LAW exceed the benefits by a substantial margin. The result is robust to alternative assumptions and estimates. A higher probability, larger magnitude, or longer duration of crises—typical consequences of ineffective macroprudential policy—all increase the margin of costs over benefits. To overturn the result, policy-interest-rate effects on the probability and magnitude of crises need to be more than 5–40 standard errors larger than the benchmark estimates.

A simple cost-benefit analysis of using monetary policy for financial-stability purposes

A simple cost-benefit analysis of using monetary policy for financial-stability purposes,” in Blanchard, Olivier J., Raghuram Rajan, Kenneth S. Rogoff, and Lawrence H. Summers, eds., Progress and Confusion: The State of Macroeconomic Policy, MIT Press, forthcoming.

Contribution to the conference Rethinking Macro Policy III: Progress or Confusion?, Washington, DC, April 15-16, 2015.

Panel intro: What can monetary policy achieve and what is the relation between monetary policy and financial stability?

What can monetary policy achieve and what is the relation between monetary policy and financial stability,” in Nowotny, E., Ritzberger-Grünwald, D. and Schuberth, H. (eds) (2015), The Challenge of Economic Rebalancing in Europe. Perspectives for CESEE Countries, Edward Elgar, chapt. 13, 177-183. Panel introduction (slides) at the Conference on European Economic Integration 2014: The Rebalancing Challenge in Europe – Perspectives for (central, eastern, and southeastern Europe (CESEE), Vienna, November 24-25, 2014.

New report: Penningpolitik och full sysselsättning (Monetary policy and full employment, in Swedish)

Riksbankens mandat bör förtydligas, sysselsättningen ges större vikt, den demokratiska kontrollen av Riksbanken skärpas och koordineringen av penningpolitiken och makrotillsynen förbättras. Det skriver jag i den nya underlagsrapporten Penningpolitik och full sysselsättning för LOs projekt Full sysselsättning och solidarisk lönepolitik.  Continue reading

Improve the democratic control of the Riksbank

[This is an English translation of an op-ed article in Swedish, published in Dagens Nyheter, May 28, 2014. The op-ed is a summary of longer article in Swedish in the journal Ekonomisk debatt.]

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.  Continue reading

DN Debatt: Skärp den demokratiska kontrollen av Riksbanken

Penningpolitiken har misslyckats. Riksbankens agerande har lett till för låg inflation och för hög arbetslöshet. Politiken brister på grund av att Riksbankschefen fått för stor makt och Riksdagens uppföljning och kontroll inte fungerar. För att avhjälpa bristerna bör den demokratiska kontrollen av Riksbanken skärpas, Riksbanksfullmäktiges utnämningspolitik förbättras, och ansvarfördelningen mellan penningpolitiken och makrotillsynen klargöras.

Artikel på DN Debatt, “Skärp den demokratiska kontrollen av Riksbanken,” 2014-05-28, mot bakgrund av en utförligare artikel i Ekonomisk debatt nr 4, “Riksbanken, måluppfyllelsen och den demokratiska kontrollen“.  Continue reading

New publication: “Monetary Policy Trade-Offs in an Estimated Open-Economy DSGE Model” (with Malin Adolfson and Stefan Laséen, Sveriges Riksbank, and Jesper Lindé, Federal Reserve Board)

New publication: “Monetary Policy Trade-Offs in an Estimated Open-Economy DSGE Model” (with Malin Adolfson and Stefan Laséen, Sveriges Riksbank, and Jesper Lindé, Federal Reserve Board), Journal of Economic Dynamics and Control 42 (2014), 33-49. PDFAbstract .

Leaning Against the Leaners

Article in Central Banking 24-2 (November 2013) 27-36.

There is much debate in Sweden and further afield about the use of monetary policy – rather than macro- and micro-prudential tools – to ‘lean against the wind’ as a way of preventing dangerous bubbles building up in economies. This article looks at whether, under a mandate of flexible inflation targeting, household debt should be introduced as an additional target for monetary policy. It also reviews how to conduct policy evaluation, drawing on six years of experience gained as a policymaker at the Sveriges Riksbank.