Mervyn & Marvin botch it!

Mervyn King and Marvin Goodfriend presented their review of the Riksbank’s monetary policy 2010-2015 on January 19. Lars Svensson did not like what he read:

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.

Goodfriend and King avoid doing a thorough evaluation of the dramatic and controversial policy tightening 2010-2011, from a policy rate of 0.25% in June/July 2010 to a rate of 2% in July 2011. On the 2010-2011 hikes, they instead simply state (italics added):

[T]he response of the Riksbank to the rapid recovery of the Swedish economy from the global financial crisis – which entailed raising official interest rates from 0.25% to 2% between June 2010 and July 2011 – was broadly accepted by all members of the Executive Board, and appears not unreasonable in the light of all the information available to the Riksbank at the time.

Although the downturn of the Swedish economy in 2008-09 was similar to that in other industrialised countries, the rebound in the Swedish economy, particularly marked in exports, was more rapid than elsewhere and led to a shared view that it was justified to begin the process of raising rates. (p.86)

You can read Svensson´s detailed critique. I´ll just show charts that indicate monetary policy was dismal after mid-2010.

The NGDP & Trend chart shows that Sweden, outside the Euro and with a floating exchange rate was quickly coming back to trend after the policy mistake of 2008 (which was a common feature to most central banks). The rate decision after mid-2010 was a gross mistake. Why did they do it? Once again the oil price effect and worries about real estate bubbles!

Meanwhile, neighboring Denmark, outside the Euro but linked to it by an exchange rate peg, did not do so well, getting clobbered by the brilliant Trichet decision of raising rates twice in 2011 (April and June) also because of oil price effects.