Substantially revised and updated on May 15, 2016.
On Thursday, May 12, the Finance Committee of the Riksdag had a hearing on the review by Marvin Goodfriend and Mervyn King of Swedish monetary policy. I had the opportunity of asking some questions at the hearing. They were: Continue reading
Remissvar på Goodfriend och Kings utvärdering av Riksbankens penningpolitik (English summary)
Jag instämmer i utredarnas kritik att Riksbanksmajoriteten med en problematisk strategi fört en för stram penningpolitik efter 2011 och medvetet ha utnyttjat överoptimistiska inflationsprognoser för att motivera en högre ränta. Jag avvisar utredarnas påstående att majoritetens stora penningpolitiska åtstramning 2010-2011 skulle varit rimlig i ljuset av tillgänglig information och återhämtningen efter krisen. Jag avvisar också utredarnas påstående att minoriteten i det stora hela skulle ha godtagit åtstramningen, eftersom den vid varje möte röstade för en måttligt lägre ränta och räntebana. Minoriteten följde en enkel och robust handlingsregel. Enligt denna skulle ränta och räntebana sänkas ett steg vid varje möte så länge som inflationsprognosen låg under målet och arbetslöshetsprognosen låg över arbetslöshetens långsiktigt hållbara nivå. Detta framkommer tydligt i protokoll och tal. Minoritetens lägre ränta och räntebana var således bara det första steget, inte det enda steget, mot en väl avvägd penningpolitik. Utredarnas rekommendationer kommenteras utförligt i mitt remissvar, men jag ser inte att deras rekommendationer skulle lösa problemen med den svenska penningpolitiken. För att lösa problemen bör Finansutskottet förtydliga Riksbankens i Riksbankslagen och dess förarbeten formulerade mandat till att vara prisstabilitet och full sysselsättning, stärka den demokratiska kontrollen av Riksbanken samt ytterligare klargöra Sveriges genomtänkta ansvarsfördelning för makrotillsyn. Continue reading
Consultation response (in Swedish) (Swedish summary)
I agree with Goodfriend and King’s criticism that the Riksbank majority, because of concerns about household debt, pursued too tight monetary policy after 2011 and deliberately used over-optimistic inflation forecasts to justify a higher policy rate. I reject Goodfriend and King’s claim that the majority’s large monetary tightening 2010-2011 was justified in the light of available information and the recovery after the crisis. I also reject Goodfriend and King’s claim that the tightening 2010-2011 was broadly accepted by the minority (Karolina Ekholm and me), because we at each policy meeting only voted for a moderately lower policy interest rate and policy-rate path.The minority followed a simple and robust policy rule. According to this, the policy rate and policy-rate path should be lowered one step at each meeting, as long as the inflation forecast was below the target and the unemployment forecast was above the long-run sustainable unemployment rate. This is clear from the minutes and speeches. The minority’s lower policy rate and policy-rate path at each policy meeting was thus just the first step, not the only step towards a well-balanced monetary policy. Goodfriend and King’s recommendations are commented in more detail in my consultation response, but I do not see that their recommendations would solve the problems with Swedish monetary policy. In order to solve the problems the Finance Committee should clarify that the Riksbank’s mandate, as formulated in the Riksbank Act and its preparatory works, is price stability and full employment. The Finance Committee should also strengthen the democratic control of the Riksbank and further clarify assignment of responsibilities in the current well thought-out framework for macroprudential policy. Continue reading
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
Matthew Klein has published an FT Alphaville post with many errors, “Sweden’s inflation record is less interesting than you think.” Its main point is that “the harshest criticisms [of the Riksbank] seem to be unjustified” and that “A reevaluation of the Riksbank’s recent record looks to be in order.” But the post’s reasoning and conclusion do not stand up to scrutiny. Continue reading
Update of previous post, now with data through March 2015 and with HICP inflation. CPIF inflation has an upward bias, since it excludes the effect on inflation of mortgage rates trending down but includes the effect of housing prices trending up. Nevertheless, counter to what is sometimes argued, the Riksbank’s target achievement does not look better with either CPIF and CPIX inflation, or with HICP inflation.
A previous post has been updated with new figures comparing the policy rates, inflation rates, and real policy rates in Sweden, the Eurozone, the UK, and the US. The Riksbank’s real policy rate increased by 3.5 percentage points to plus 1 during 2010-2011, whereas the real policy rates stayed low and negative in the other economies. According to this measure, the Riksbank’s policy was extremely tight during 2010-2013. More recently, the real policy rates has fallen in Sweden and risen in the other economies except the US. Continue reading
My cost-benefit analysis of the Riksbank’s leaning against the wind 2010-2011 (estimated benefits are about 0.4 percent of the costs) has received some attention and is available on page 25-30 in this paper.
This is an English translation of an Ekonomistas post.
The current Riksbank monetary policy is inconsistent. This creates uncertainty, which in turn weakens the efficiency of monetary policy. The detailed minutes of the monetary policy meetings are an important part of the Riksbank’s communication policy. Oddly enough, such minutes are missing from the Riksbank’s latest monetary policy decision, creating additional uncertainty about monetary policy. It is important that monetary policy is clear and credible. This increases the Riksbank’s power to create consensus among economic decision makers about the economic outlook and thereby reduce uncertainty, which is good for the economy.
This is an English translation of a Swedish Ekonomistas guest post by Stefan Palmqvist, PhD, who works as an advisor at Finansinspektionen (the Swedish Financial Supervisory Authority). The opinions expressed are his own and not necessarily those of anyone else at Finansinspektionen.
In a post on Ekonomistas (in Swedish), Mats Persson discusses if the Riksbank should use more weapons than the repo rate. Mats argues that such actions would not do any harm at present, but that they also would not do much good. I mean that they certainly can do harm. The Riksbank’s current interest rate path indicates that the repo rate will be increased, while the Riksbank at the same time buys government bonds to bring down interest rates in general and to weaken the krona. With such a contradictory monetary policy the Riksbank’s possibility to influence expectations is reduced, which in turn can make it difficult to achieve the inflation target. Continue reading
In his blog post “Should monetary policy take into account risks to financial stability?“, Ben Bernanke refers to the Swedish experience and my cost-benefit calculation, using the Riksbank’s own estimates, of the Riksbank’s leaning against the wind from the summer of 2010. According to this calculation, the benefit of the Riksbank’s actions was only about 0.4 percent of the cost.
Paul Krugman has a post on self-justifying Swedes.