Sweden: “The sins of the father”

And now Sweden joins the “below zero” club and will also join the QE club. According to Riksbank Governor Ingves:

“We are prepared to make monetary policy more expansionary,” Governor Stefan Ingves said at a press conference. The bank doesn’t see a lower limit on rates and can buy as much in government bonds as is “appropriate,” he said.

It´s never too late, but it is worth remembering all the arguments put forth by Lars Svensson before he quit the Board in disgust.

As the charts clearly indicate, Sweden fell into the “inflation obssesion trap”, which usually makes the mistake of tightening policy because of a supply shock (oil in this case) and also gets all “finicky” about asset prices.

Given the course of NGDP, the rise in rates from late 2005 to mid 2007 were the adequate response to keep NGDP on the target path. With the rise in oil prices in 2007-08, the Riksbank mistankenly tightened policy. That had the effect (like in most countries who acted the same way) to depress aggregate demand (NGDP).

The mistake was quickly corrected so that by the end of 2009 Sweden took the path “back to trend”. Another reaction to oil prices (and “bubble” worries”) sent the Riksbank on the “road to perdition”.

Sweden NGDP

Sweden CPI

Hopefully this time they´ll succeed!


One thought on “Sweden: “The sins of the father”

  1. QE is better than nothing but I wonder when they’ll figure out that inflation targeting is not all ‘that’. After this global monetary mess, I am rather astounded that someone in the central bank circle hasn’t questioned why they’re still forcing an untenable policy.

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