Lars Svensson, one of the most famous proponents of IT, considers:
An odd thing is the Riksbank’s repeated assertions, if not nagging, about how expansionary the Riksbank’s monetary policy is supposed to be. “A very expansionary monetary policy,” it says in the Monetary Policy Update December 2014, and so said the Governor Ingves at the press conference after the policy announcement. But according to what criterion would monetary policy be expansionary? According to standard criteria, including comparisons with other countries, the Riksbank’s monetary policy is by no means expansionary, but by all accounts quite contractionary. One may ask whether the Riksbank’s repeated assertions are due to ignorance or is an example of disinformation.
In the space of a few weeks they are not so sure (about how expansionary monetary policy is):
STOCKHOLM—The minutes of the Swedish central bank’s most recent monetary policy meeting confirmed that unconventional measures are being prepared in case they are needed, but the board’s preferred option remains postponing interest rate increases if inflation fails to pick up.
The Riksbank cut its policy rate to zero in October seeking to boost inflation closer to a 2% target but didn’t change rates at a meeting on Dec. 15. The consumer-price index fell 0.2% in annual terms in November, opting instead to postpone rate increases until the second half of next year.
In the minutes of that meeting published Thursday, Governor Stefan Ingves said it is now time to prepare unconventional measures which, if the need arises, could be presented at the next monetary policy meeting in February.
Sweden is really becoming a “show-case” for the “schizophrenic” (a mental disorder often characterized by abnormal social behavior and failure to recognize what is real. Common symptoms include false beliefs, unclear or confused thinking, auditory hallucinations, reduced social engagement and emotional expression, and inactivity. Diagnosis is based on observed behavior and the person’s reported experiences.) nature of inflation targeting, especially when it has to deal with price shocks.
In the charts one can clearly identify the reason for the Riksbank tightening of policy, both in 2008 and again in 2010-11. Oil Price!
The consequence is also crystalline. A significant fall off in the trend growth of aggregate spending!
When will central bankers realize that the level of the policy rate is a very poor indicator of the stance of monetary policy?
A modest suggestion: For every candidate for central bank governor or board member ask only one pass(no)/fail(yes) question. “Do you believe the policy rate is a good indicator of the stance of monetary policy?” If the answer is “no”, dig deeper and ask “why”.