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
“Amortization Requirements May Increase Household Debt : A Simple Example,” IMF Working Paper No. 16/83, April 2016.
The idea is very simple. If you like to have a mortgage of SEK 2 million the next 10 years, you would take out an interest-only mortgage of SEK 2 million now and keep it for 10 years. However, if you learn that new amortization requirements imply that you have to pay back 2 percent of the initial mortgage every year, you would prefer to borrow SEK 2.5 million now, put the extra SEK 0.5 million in a savings account, and then use withdrawals from the savings account to amortize 2 percent of SEK 2.5 million each year, that is, SEK 50,000 each year and SEK 500,000 in 10 years. Thus, if an LTV cap is not binding you would borrow SEK 2.5 million, or as much as the LTV cap allows you to borrow. Continue reading
“Should monetary policy ever lean against the wind?“, slides for presentation at the conference “The ECB and Its Watchers XVII” organized by the Center for Financial Studies and the Institute for Monetary and Financial Stability, Frankfurt, April 7, 2016.
“Swedish monetary policy experience,” slides for presentation at Valutaseminariet 2016, Oslo, February 3, 2016.
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
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 obvious costs 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.
The text is now available of the discussion of of “Inflation targeting does not anchor inflation expectations: Evidence from firms in New Zeland” by Saten Kumar, Hassan Afrouzi, Olivier Coibion, and Yuriy Gorodnichenko at the Fall 2015 Brookings Panel on Economic Activity, Washington, DC, September 10-11, 2015.
Panel discussion, “Optimal Design for Monetary Policy in the Post Crisis Period” (slides), at the conference “Monetary Policy Implementation and Transmission in the Post-Crisis Period,” Federal Reserve Board, Washington, DC, November 12-13, 2015.
Excel sheet used in slide 5 for the simple example of a cost-benefit analys of leaning against the wind.
Discussion (slides) of Adair Turner, “The Case for Monetary Finance – An Essentially Political Issue,” at the 16th IMF Annual Research Conference, “Unconventional Monetary and Exchange Rate Polices,” November 5-6, 2015, IMF, Washington, DC.
Video (my discussion starts 25 minutes into the session).
A more rigorous and analytical treatment of the issue is available in this paper by Willem Buiter.