Lars Svensson, Market Keynesian

Stefan Elfwing sent me this report from the Swedish Riksbank:

Deputy Governor Lars E.O. Svensson stated that he enters a reservation against parts of the draft Monetary Policy Report. Mr Svensson prefers that the repo rate is cut by 25 basis points to 1.75 per cent at this meeting and then a lower repo-rate path which is at 1.5 per cent from the first quarter of 2012 and until the end of the first quarter of 2013, and which then rises at an even pace to slightly above 3 per cent at the end of the forecast period.
He feels that the repo-rate path in the main scenario is too high for three reasons. Firstly, as he has said, an unjustified high forecast for policy rates abroad gives a bias towards a too high repo-rate path. Secondly, there is a bias towards overestimating resource utilisation. Thirdly, even if one accepts the high forecast for policy rates abroad and the high estimate of resource utilisation and the sustainable unemployment rate of 6.5 per cent, one can still show that a lower repo-rate path stabilises CPIF inflation better around 2 per cent and unemployment better around a level of 6.5 per cent. Regardless of how one views it, the main scenario thus entails monetary policy that is not well balanced.

Mr Svensson said that he actually thinks that this is fairly self-evident. Since the meeting in September the situation for the Swedish economy has deteriorated. The forecasts for inflation and resource utilisation have been adjusted downwards for an unchanged repo rate path. The repo-rate path in the main scenario has been lowered in relation to September, but not far enough. With the new repo-rate path the forecast for CPIF inflation is still too low and the forecast for unemployment is still too high. Lowering the repo-rate path further would improve target fulfilment for both inflation and unemployment. This should be obvious to everyone. Mr Svensson felt that one doesn’t need to be an expert on monetary policy to understand it.  (Emphasis added throughout this post)

Keep in mind that Sweden is an ultra-nice society.  You might want to translate the last sentence into Italian, and imagine how it would have been phrased if uttered by one of Berlusconi’s henchmen.  I found the entire document a joy to read, as Svensson continually used his razor sharp reasoning to slice and dice his colleague’s sloppy arguments for doing nothing.

So why isn’t the repo-rate path being lowered further? Mr Svensson went on to say that a few muddled reasons are given at the end of Chapter 2. It is claimed that economic activity will fall because companies and households will postpone consumption and investment due to the uncertainty over future developments. In such a situation, it is doubtful whether monetary policy will have the same immediate effect as indicated by the historically-estimated links. It would require a more uneven repo-rate path to stimulate the economy.

This appears to be speculation and has no foundation. The arguments are not convincing and raise several questions. Why is it increased uncertainty and not lower expectations of future income and demand that will make households and companies reduce their consumption and investment? And if it is increased uncertainty, why should this mean that monetary policy has less impact? And why should a specially-uneven repo-rate path be necessary in this situation? Why wouldn’t a lower, relatively smooth repo-rate path provide a better and acceptable outcome? And how can one discuss these issues without showing how the various repo-rate paths would look? Where is the analysis that supports these claims? As far as Mr Svensson could see there was no such analysis. It all gives an impression of excuses added on afterwards.

This also drives me nuts.  Tight money reduces AD growth expectations.  That naturally makes people more uncertain about the future.  Then my opponents claim the problem isn’t tight money, it’s uncertainty.  Yes, and panic on the Titanic wasn’t caused by a iceberg gouging the ship, it was caused by uncertainty about when they’d reach New York.

If, in this situation, the repo rate were really to have less effect on inflation and resource utilisation than usual, it would be a reason to cut the repo rate further, not less, to have the same effect.

Memo to Richard “pushing on a string” Fisher.  Please read Lars Svensson.

In autumn 2008 and later, following Lehman, in a situation with maximum uncertainty and minimum confidence among economic agents, it was by acting forcefully and making large interest-rate cuts that enabled central banks around the world to contribute to ensuring that the crisis did not develop into the Great Depression II.

If one takes the increased uncertainty seriously, it must be so that the increased uncertainty means a greater probability that the situation may deteriorate so much that the zero lower bound may bind the policy rate in the future. In this case, academic research results unequivocally say that there is justification for lowering the policy rate further and more quickly than is justified by the forecasts for inflation and resource utilisation. This also reduces the risk of being caught in the future in a situation with a binding lower bound for the policy rate.

Obviously I think he’s being too kind to the other central banks.  Note that as early as the spring of 2008 there was a real danger of a liquidity trap developing in America.  Yet the Fed never cut rates once between May and October, even after Lehman failed.  But the basic argument is right, if there’s downside danger of a zero rate trap, you move aggressively, you don’t wait for more information.

Moreover, it is stated in the draft Monetary Policy Report that a lower repo-rate path would entail a risk that housing prices and household indebtedness once again began to develop in a way that would lead to imbalances in the economy in the longer run. Mr Svensson wondered what has happened to the conclusions from the Riksbank’s large inquiry into risks in the housing market. This stated that the policy rate is a blunt instrument, not suitable for influencing housing prices and indebtedness as it can have very negative consequences for the real economy, and that there are other instruments, such as the mortgage ceiling and so on, that are much more effective. And what kind of imprecise and indeterminate imbalances are we talking about? The results of the Riksbank’s inquiry show that there are no signs that houses are over-valued, but that housing prices are quite compatible with the fundamentals, mainly a large demand and small supply.

.   .   .

Moreover, this talk of unspecified imbalances in the longer run appears to mean that all of the work on financial stability is repudiated. The Financial Stability Report closely monitors threats to financial stability and risks due to high leverage and low liquidity are managed much better with capital adequacy and liquidity requirements than with the repo rate.

So, why should housing prices and household borrowing be promoted to target variables that justify inflation being too low and unemployment being too high? Monetary policy should not be the first, but the last line of defence with regard to financial stability, to be used only in cases where the normal financial stability tools do not work or are insufficient. There is now an abundance of instruments for managing financial stability.
Nor should the repo rate be an explicit or implicit target variable. It should solely be used as a means to stabilise the correct target variables, inflation and resource utilisation.

As Governor Strong said before he died in 1928:

Must we accept parenthood for every economic development in the country?  That is a hard thing for us to do.  We would have a large family of children.  Every time one of them misbehaved, we might have to spank them all.

Exactly.  Deal with financial excess through better financial regulation, and deal with inflation and output (NGDP) via monetary policy.  Back to Svensson:

It is clear that the repo-rate path in the main scenario gives a CPIF forecast well under 2 per cent. A lower interest-rate path abroad, together with the repo-rate path in the main scenario, gives a greater interest rate differential and a stronger krona that brings down inflation. The lower repo-rate path gives higher CPIF inflation closer to the target and a much lower forecast for unemployment closer to 5.5 per cent. Target fulfilment for both inflation and unemployment will be much better with the lower repo-rate path.

Note that this result is not sensitive to the assumption of a sustainable unemployment rate of 5.5 per cent. The lower interest-rate path also gives better target fulfilment if the sustainable unemployment rate is assumed to be 6 or 6.5 per cent.

Imagine that, a central bank refrains from additional stimulus even though it would push both inflation and employment closer to target.  Lucky our Fed never misses those free lunches, those $100 bills lying on the sidewalk.

Here Svensson lectures his colleague on the difference between a policy indicator and a policy target:

Deputy Governor Lars E.O. Svensson said that he reacted when Mr Öberg said it was unclear what the high unemployment entails for resource utilisation, immediately after Mr Svensson had said that the unemployment gap was the most relevant and reliable measure of resource utilisation as a target variable. Here it is important to distinguish between measures of resource utilisation as a target variable and measures of resource utilisation as indicators of inflationary pressures. They are not the same thing. This is something that has been discussed several times at earlier meetings, said Mr Svensson.

Mr Svensson said that Mr Öberg was probably referring to the measures of resource utilisation as indicators of inflationary pressures. Such measures enter monetary policy and influence the repo-rate path solely through their effect on the inflation forecast. They are merely indicators, not target variables. Measures of resource utilisation as a target variable are a different thing. The unemployment gap between actual unemployment and the sustainable unemployment rate is a target variable. All else being equal, it is desirable to stabilise unemployment around the sustainable level. This unemployment gap is not necessarily the best indicator of inflationary pressures.

And here he discusses “loss of face:”

With reference to Ms Ekholm’s contribution to the discussion on the risk of the Riksbank causing damage to its reputation if it first cuts the repo rate and then needs to increase it again, Mr Svensson felt that it was quite possibly this type of consideration regarding loss of face that lay behind the discussion of an uneven repo-rate path in the Monetary Policy Report. However, it entails a greater risk of damage to its reputation for the Riksbank to deliberately choose an interest-rate path that does not entail a well-balanced monetary policy with regard to inflation and resource utilisation. At each monetary policy meeting one should draw up a repo-rate path that best stabilises both inflation and resource utilisation in an unbiased sense. This ought to be what is best for the Riksbank’s reputation in the long run. The probability should then normally, specifically using symmetrical probability distributions, be roughly the same for later needing to raise or lower the repo-rate path. These changes in the path need not in themselves lead to any damage to the Riksbank’s reputation, according to Mr Svensson.

Loss of face?  This is the Riksbank, not the PBoC!  I’m only 1/4th Scandinavian, and I don’t worry about losing face.  Recall the Fed meeting in late 1937 that Marcus Nunes dug up?  A Fed official basically admitted that they should ease, but failed to do so because he was fearful it would make their previous decision (to raise reserve requirements) look bad.  I also like the symmetry argument.  Does anyone believe the Fed is equally likely to ease further or tighten further over the next 6 months?

And here Svensson basically says; “Thank God the markets don’t believe we’ll be as tight at my colleagues predict:”

The red curve in Figure 2 shows how the Swedish yield curve would look if the repo-rate path in the main scenario gained full credibility and forward premiums are normal. It is then clear that a five-year rate would be roughly 190 basis points higher than now. This would not be good for the Swedish economy. It gives reason to really hope that the market continues to set the current low market rates, emphasised Mr Svensson.

And here he explains what monetary policy should and should not do:

Deputy Governor Lars E.O. Svensson commented on Mr Nyberg’s discussion of macroprudential supervision, that is, financial stability policy, by emphasising that it is important to realise that policy for financial stability is not the same as monetary policy.

Fiscal policy is not considered to be monetary policy. Fiscal policy has its objectives, primarily efficiency, stability and an even income distribution, and its instruments, primarily taxation and spending. Monetary policy has its objectives, stable inflation and resource utilisation, and its instruments, primarily the policy rate and communication. Fiscal policy influences inflation and resource utilisation. This means that monetary policy must give consideration to the way that fiscal policy is conducted when setting the interest rate, but it does not mean that fiscal policy is monetary policy.

I hope all MMTers will read this report.

In the same way, the policy for financial stability and monetary policy are different policies. The policy for financial stability has its own objective, that is financial stability, and its own instruments, primarily regulation and supervision. The policy for financial stability affects financial markets, spreads between interest rates, the functioning of financial markets and the transmission mechanism. This means that monetary policy must give consideration to how the policy for financial stability is conducted when setting the interest rate to attain the monetary policy objectives. It also means that the policy for financial stability must take into account how monetary policy is conducted when supervision and regulation are used to attain and maintain financial stability. But it does not mean that monetary policy and the policy for financial stability are the same thing.

I hope all Austrians will read this report.

And finally, Lars Svensson explains that it’s dangerous to base policies on policymaker predictions of future market outcomes that are wildly at variance with market predictions of future market outcomes (skim the first three paragraphs):

Deputy Governor Lars E.O. Svensson pointed out that he has a more pessimistic view of the real economy than the one presented in the draft Monetary Policy Report with regard to inflation and GDP abroad. He fears that it is less likely that the debt crisis in Europe will be resolved in a good way and that the effects on the real economy and fiscal policy tightening will thus be more negative. As he has pointed out earlier, and as Ms Ekholm has stressed, there are problems with the assumptions regarding interest rates abroad and the forecast for policy rates abroad. As he had demonstrated with the aid of a figure at the monetary policy meeting in July, the forecast for policy rates abroad has systematically been too high for several years, with the outcome systematically lower than the forecast. A too high forecast for policy rates abroad leads to a bias towards a too high repo-rate path, all else being equal. A higher interest rate path abroad will, all else being equal, lead to a smaller difference between Swedish interest rates and those abroad, and to a weaker krona. The Swedish repo-rate path must then be higher to counteract this.  [Note; he means it will erroneously be set too high.]

Mr Svensson then showed some figures to illustrate his reasoning. The figures contain forecasts and assessments beyond the normal forecast horizon that Mr Svensson has made himself. In Figure 1 the yellow line shows the current forecast for TCW-weighted interest rates abroad. The grey line shows TCW-weighted implied forward rates, adjusted by normal forward premiums, that is, 1 basis point per month. The forecast is very high above the implied forward rates and gives rise to a substantial upward shift in the Riksbank’s repo-rate path. There is no discussion of these important circumstances in the draft Monetary Policy Report and there is no explanation of this high forecast, despite the fact that it has major consequences for the repo-rate path.

The forecast for interest rates abroad can also be perceived as an assumption on and a forecast for yield curves abroad, that is, interest rates abroad for different maturities. In Figure 2 the grey curve shows the actual TCW-weighted yield curve abroad, more specifically that which is compatible with the extended forward rate curve in Figure 1, while the yellow curve shows the yield curve abroad that is compatible with the Riksbank’s forecast for policy rates abroad. A TCW-weighted five-year market rate is roughly 110 basis points. The Riksbank’s high forecast for policy rates abroad corresponds to a five-year rate that is 100 basis points higher. Mr Svensson pointed out that one could simplify by saying that the Riksbank’s analysis is based on the five-year rates abroad being 100 basis points higher than they actually are.

Mr Svensson pointed out that in this context it may be interesting to see what Norges Bank had forecast for forward rates abroad in its most recent Monetary Policy Report at its meeting on 19 October. They stated that there were no strong reasons for assuming that interest rates abroad would normalise more quickly than is indicated by market rates, that is, by forward rates. They also emphasised that the Federal Reserve had signalled that its policy rate will remain low for a long time. Norges Bank’s forecast for policy rates abroad thus agrees with forward rates.

To sum up, Mr Svensson claimed that the forecast for policy rates abroad is much too high and that this contributes to the repo-rate path being too high. It would be better to let the forecast to be based on forward rates abroad and then adjust it on the basis of an assessment of monetary policy in the euro area, the United Kingdom and the United States. Mr Svensson claimed that he had pointed out on several earlier occasions that it is important to monitor this issue, and that potential deviations from implied forward rates should be justified and carefully discussed, as they have a major effect on the domestic interest-rate path.

Translation into Swedish.  “My God!  How many times do I have to explain this?  Even those country bumpkins in Norway get it.”

Lars Svensson, market Keynesian.  If only we could convince him to become a market monetarist.


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36 Responses to “Lars Svensson, Market Keynesian”

  1. Gravatar of Lars Christensen Lars Christensen
    13. November 2011 at 15:26

    Scott, Happy to say I will to Stockholm Monday morning – unfortunately not to talk to Lars E. O….but you are of course right. He is a very clever man indeed.

    The market is already pricing in Swedish interest rate cuts and it is also pretty clear that it is needed.

    The old monetarist in me tells me to have a money base numbers from time to time – it is pretty clear that Riksbanken actually have been tightening for sometime. The board of Riksbanken probably is unaware of that however…

  2. Gravatar of marcus nunes marcus nunes
    13. November 2011 at 15:56

    Scott. Good memory you have. I think it´s worthwhile making the quote available. And John Williamson (not to be confused with the present president of the SF Fed) was a VIP! Harvard prof, Fed Board Member AND its Chief-Economist. This is how he put it in November 1937:

    The following evaluation of the situation by Williams at the November 1937 meeting is informative, both for offering a frank admission that the FOMC apparently wished for a slowdown to occur and also for outlining the case that the recession, nonetheless, had nothing to do with the monetary tightening that preceded it. Particularly enlightening is the reasoning offered by Williams as to why a reversal of the earlier tightening action would be ill advised.
    We all know how it developed. There was a feeling last spring that things were going pretty fast … we had about six months of incipient boom conditions with rapid rise of prices, price and wage spirals and forward buying and you will recall that last spring there were dangers of a run-away situation which would bring the recovery prematurely to a close. We all felt, as a result of that, that some recession was desirable …
    We have had continued ease of money all through the depression. We have never had a recovery like that. It follows from that that we can’t count upon a policy of monetary ease as a major corrective. …
    In response to an inquiry by Mr. Davis as to how the increase in reserve requirements has been in the picture, Mr. Williams stated that it was not the cause but rather the occasion for the change. … It is a coincidence in time. …
    If action is taken now it will be rationalized that, in the event of recovery, the action was what was needed and the System was the cause of the downturn.
    It makes a bad record and confused thinking. I am convinced that the thing is primarily non-monetary and I would like to see it through on that ground.
    There is no good reason now for a major depression and that being the case there is a good chance of a non-monetary program working out and I would rather not muddy the record with action that might be misinterpreted. (FOMC Meeting, November 29, 1937. Transcript of notes taken on the statement by Mr. Williams.)

  3. Gravatar of marcus nunes marcus nunes
    13. November 2011 at 16:09

    As Governor Strong said before he died in 1928:

    Must we accept parenthood for every economic development in the country? That is a hard thing for us to do. We would have a large family of children. Every time one of them misbehaved, we might have to spank them all.

    Reminds me of the BoE in late 1998 (remeber the Asia and Russia crisis) justifying an increase in rates by the fact that they had “identified” a house price boom in the South East (London – Dover corridor)of the country. Funny they felt confortable “spanking” all the other regions of the country. And never linked the house price rise in the SE to the fact that higher MTRs in France (50% higher)was driving hoardes of enterprising people over to England, where they would likely settle nearest to France (week-end trips to visit mom and pa and eat some foie gras). If later you asked where the “Silicon Valley” of France was located, the correct answer would be the London-Dover corridor!

  4. Gravatar of ssumner ssumner
    13. November 2011 at 17:18

    Lars, Imagine how much worse it would be without Svensson–he keeps then honest.

    Marcus, I just added a link to my post where I discuss the 1937 quotation.

    The French angle is interesting. I wonder if the recent rise in British MTRs will affect the attractiveness of Britain for highly talented people.

  5. Gravatar of c8to c8to
    13. November 2011 at 20:24

    you have to turn a svennson into a christensen!

  6. Gravatar of c8to c8to
    13. November 2011 at 20:38

    “A Fed official basically admitted that they should ease, but failed to do so because he was fearful it would make their previous decision (to raise reserve requirements) look bad.”

    Haha! The swedish one is maybe even a little funnier/worse where he’s saying they were fearful of doing the right thing now, in case its effective in future and then they would have to apply the brakes later, so better just to do nothing now.

    (are you a Lars half-full or Lars half-empty type of person?)

  7. Gravatar of Ram Ram
    13. November 2011 at 20:50

    Off topic but c/o Justin Wolfers’ Twitter feed, I see that the most cited paper by the new Greek PM (coauthored with Modigliani in 1975) endorses NGDP targeting:

    http://www.jstor.org/pss/2534063

  8. Gravatar of Mattias Mattias
    14. November 2011 at 00:20

    In Swedish papers Svensson is usually described as one of two doves who most of the time lose the votes to the four hawks. What’s interesting is that two of the hawks will quit soon. Hopefully Svensson gets at least one more ally.

    But maybe the whole concept of doves and hawks is flawed. Maybe the difference is not between easy and hard money people, but between those who base their analysis on studies of monetary policy and those who find other sources for reaching a conclusion.

  9. Gravatar of RebelEconomist RebelEconomist
    14. November 2011 at 01:03

    Since Svensson makes much of assigning policy instruments to their most appropriate jobs, I always wonder why monetary policy, which is essentially about the simple job of supplying enough money to facilitate transactions, should be given any real objectives at all. For example, if unemployment is regarded as unacceptably high, wouldn’t it be more appropriate to shift the burden of taxation away from labour income to elsewhere (especially if you can find an activity that you would be not unhappy to constrain – eg carbon taxes).

    During this downturn, I often have got the impression that the politicians, in the US and UK at least, have successfully conned the central bankers into accepting entire responsibility for real activity, thus avoiding politically difficult decisions like changing taxes and regulations. I rather liked the old (Duisenberg?) line that the best contribution that central banks could make to promoting real activity was to keep inflation low and stable.

  10. Gravatar of Mikael Mikael
    14. November 2011 at 01:54

    I am a not an economist, just a Swede with a growing interest in global matters, so please forgive my lack of deeper understanding.

    Just curious, let say that we have a group of people that for some reason is reluctant to work since the welfare system is quite extensive. How would lower rates aid in getting this group to work?

    Lets also say that another group (quite large by now) is of lower education and not really keen on being a part of the Swedish society.

    How would lower interest rates aid in lowering this unemployment? From my point of view, all it would do is to eat away on my savings interest.

  11. Gravatar of marcus nunes marcus nunes
    14. November 2011 at 03:04

    @Mikael
    That´s the paper that coined the cocept of NAIRU (initially NIRU)to argue that MP could be expansionary w/o being inflationary because unemployment (following the first oil shock)was far above its “NIRU”.

  12. Gravatar of Dan Kervick Dan Kervick
    14. November 2011 at 05:21

    Although he doesn’t think of it this way, Svensson’s demurrals bring out the urgent need for major central bank and monetary policy reform across the western world. We have invested far too much macroeconomic policy responsibility in our “independent” central banks, looking to them to do jobs that central bankers really cannot do, and to fulfill mandates that they cannot possibly fill. Then we get sad debates like this one, with some folks arguing energetically, in a well-meaning but forlorn way, that the banks should still at least try to do the jobs they can’t do, against others who don’t even want to try.

    I find Svensson’s characterization of fiscal policy strange. The “objectives” of fiscal policy are said by Svensson to be efficiency, stability and an even income distribution, and its instruments, primarily taxation and spending. Monetary policy on the other hand, has the “objective” of stable inflation and resource utilization. But then it is granted that fiscal policy “influences” inflation and resource utilization.

    Well of course fiscal policy “influences” resource utilization! Government spending does something that central banks cannot do – it directly employs resources! You want a government to make sure unemployed construction workers and construction equipment are employed? Then hire construction outfits to build stuff. Don’t imagine that the chief way in which the government impacts resource employment is by buying securities, which only has a marginal impact on the availability of private financing for jobs that the private sector has already shown it has no great interest in doing.

    And taxation-and-transfer policies do something that no central bank can do – they directly remove surplus savings from the accounts of those who do not use them for consumption or production, and give them to people who will use them for those purposes.

    We in the West need to integrate our monetary policy authorities much more closely with our treasuries and legislatures, so that monetary policy can be a useful tool for countercyclical fiscal policy.

  13. Gravatar of Morgan Warstler Morgan Warstler
    14. November 2011 at 07:58

    Dan, I prefer the legislature just takes its cues from the independent Fed.

    As soon as you let go of getting free shit from other people, you’ll be able to support that.

  14. Gravatar of OhMy OhMy
    14. November 2011 at 08:28

    MMT would simply say that Svensson uses muddled definitions of fiscal/monetary policies. The distinction is very easy: fiscal policy creates/destroys state money, monetary policy determines the price of state money by conducting *swaps* of different forms of money (interest bearing and not) to set the rate.

    Fiscal policy are the vertical operations, as simple as that:
    http://bilbo.economicoutlook.net/blog/?p=332

    One wonders when QMs will get that and stop inventing new definitions at every turn.

    Unrelated: Mosler shows that the Fed cannot create inflation, but fiscal policy easily could:
    http://moslereconomics.com/2011/11/14/it-must-be-impossible-for-the-fed-to-create-inflation/

  15. Gravatar of StatsGuy StatsGuy
    14. November 2011 at 09:17

    “Why is it increased uncertainty and not lower expectations of future income and demand that will make households and companies reduce their consumption and investment?”

    That is the question of the decade for monetary policy. Or, at least one of them.

  16. Gravatar of TravisA TravisA
    14. November 2011 at 09:54

    What characteristics distinguish the market keynesian (MK) from the market monetarist (MM)?

    Maybe number 1 is that the MK thinks that interest rates are the primary transmission mechanism for monetary policy, while MM thinks that the cash balance effect is primary. Number 2: the MK focuses on inflation expectations while the MM focuses on NGDP expectations. Anything else?

  17. Gravatar of Steve Steve
    14. November 2011 at 10:52

    My favorite Svensson quote from your post:

    “If one takes the increased uncertainty seriously, it must be so that the INCREASED UNCERTAINTY MEANS A GREATER PROBABILITY THAT THE SITUATION MAY DETERIORATE SO MUCH THAT THE ZERO BOUND MAY BIND THE POLICY RATE IN THE FUTURE. In this case, academic research results unequivocally say that there is justification for lowering the policy rate further and more quickly than is justified by the forecasts for inflation and resource utilisation.”

    How many times have I heard the ‘hawks’ say that uncertainty is a reason to RAISE the policy rate above zero so that the fed has more ‘bullets’ in such case as the economy becomes ‘horrific’? But here Svensson is saying lower rates in an uncertain environment to reduce the odds that the zero bound comes into play!

  18. Gravatar of Matt Franko Matt Franko
    14. November 2011 at 12:42

    Seems all of the orthodox economists cannot acknowledge MMT without mis-characterizing it … nobody in the academic leadership of MMT believes fiscal policy and monetary policy are the same things or gets them confused with each other…. I dont know where you are coming from on this. Perhaps I miss your point. Resp,

  19. Gravatar of John John
    14. November 2011 at 14:00

    Scott,

    You’re never gonna convert the Austrians because there really is a fundamental divide between us and the other schools of thought. We see the economy as a complex but ordered naturally arising system and everyone else sees is as something to manage and fix like a simple machine. For Austrians, every intervention into the marketplace is going to distort and create suboptimal outcomes–suboptimal from the point of view of the policy maker–the same goes with regard to money. We want to accept and encourage market outcomes and you want to change them. You aren’t going to have success converting the true fiscal conservatives until you come around to this point of view.

  20. Gravatar of Benny Lava Benny Lava
    14. November 2011 at 15:56

    Scott,

    I expect Austrians to dismiss your arguments blithely with a talking point about inflation and theft. Paging Bob Murphy!

  21. Gravatar of ssumner ssumner
    14. November 2011 at 18:07

    C8to, Yes, I don’t know which one is worse.

    Ram Thanks for the link. Unfortunately, he has no monetary policy to work with.

    Mattias, Yes, the system is more important than the individuals. And Sweden has a good system.

    RebelEconomist, I don’t think we can count on the fiscal authorities to do the right thing, just because inflation is low and stable.

    Mikael, You asked:

    “Just curious, let say that we have a group of people that for some reason is reluctant to work since the welfare system is quite extensive. How would lower rates aid in getting this group to work?
    Lets also say that another group (quite large by now) is of lower education and not really keen on being a part of the Swedish society.
    How would lower interest rates aid in lowering this unemployment? From my point of view, all it would do is to eat away on my savings interest.”

    It would not help at all in those cases. The Riksbank tries to take that into account when forecasting the natural rate of unemployment. But you raise a good point, which is why I favor targeting NGDP, not prices and unemployment.

    Monetary stimulus would not hurt Swedish savers, in my view. In the long run savers do best with a healthy growing economy. Look at Japan, where they’ve had deflation for 20 years–savers are doing very poorly. You cut rates now so that you can raise them much higher later on.

    Dan, You said;

    “I find Svensson’s characterization of fiscal policy strange. The “objectives” of fiscal policy are said by Svensson to be efficiency, stability and an even income distribution, and its instruments, primarily taxation and spending. Monetary policy on the other hand, has the “objective” of stable inflation and resource utilization. But then it is granted that fiscal policy “influences” inflation and resource utilization.”

    I’m afraid it isn’t just Svensson, he is expressing the standard new Keynesian view. Even Krugman would disagree with you, as Krugman believes fiscal policy is only needed at zero rates.

    OhMy, You said:

    “One wonders when QMs will get that and stop inventing new definitions at every turn.”

    New definitions? Would that be like that group that defines fiscal policy as control of the money supply?

    Statsguy, I’ll have a post on that soon.

    TravisA, Those are good–I think Keynesians also put more weight on the output gap as a driver of inflation.

    Steve, Very good point.

    Matt, Read OhMy above.

    John, You said;

    “We want to accept and encourage market outcomes and you want to change them.”

    Totally false. You should understand my views before you criticize them. I favor a policy that leaves wages and prices at their equilibrium values.

    And I’ve already converted the most important Austrian–Hayek. I’m told there are other Austrians moving toward NGDP targeting, but don’t have the details.

  22. Gravatar of OhMy OhMy
    14. November 2011 at 19:25

    SSumner.

    Yes, fiscal policy is controlling the money supply, fiscal authority destroys and creates money, fact of life. Monetary policy is not: swapping reserves for bonds doesn’t control the money supply. Talk to someone at a bank and look at the failure of Friedman’s policies.

  23. Gravatar of OhMy OhMy
    14. November 2011 at 19:56

    SSumner,

    Start here:
    http://en.wikipedia.org/wiki/Fiscal_policy

    “In economics and political science, fiscal policy is the use of government expenditure and revenue collection (taxation) to influence the economy”.

    Fiscal policy destroys and creates state money. Monetary policy swaps forms of state money. If you disagree MMT can prove you wrong.

  24. Gravatar of W. Peden W. Peden
    14. November 2011 at 20:34

    OhMy,

    MMT does not define ‘fiscal policy’ as control of the money supply.

    You need to read up on MMT.

  25. Gravatar of TravisA TravisA
    15. November 2011 at 06:36

    Scott, if market keynesians focus on the output gap as a driver of inflation, are market monetarists focused on the slope of the AS curve?

  26. Gravatar of Doc Merlin Doc Merlin
    15. November 2011 at 07:32

    @TravisA

    “Scott, if market keynesians focus on the output gap as a driver of inflation, are market monetarists focused on the slope of the AS curve?”

    No, market monetarists believe that excess money printing causes inflation, not demand/supply issues. Milton Friedman, the most famous market monetarist said, “Inflation is always and everywhere a monetary phenomenon.”

    Furthermore, the AS/AD model is inherently keynesian, and a lot of freshwater economists (for example Sims, this year’s nobel prize winner) don’t believe AD exists at all.

  27. Gravatar of Doc Merlin Doc Merlin
    15. November 2011 at 07:34

    “Fiscal policy destroys and creates state money. Monetary policy swaps forms of state money. If you disagree MMT can prove you wrong.”

    Gaaa another MMTer.

    MMT is baloney.

  28. Gravatar of ssumner ssumner
    15. November 2011 at 12:35

    OhMy, You seem to have your own private language. It helps if you use terms as others use them.

    TravisA, I’m tempted to say that MM don’t focus on inflation. But obviously I can’t speak for all. I think it’s fair to say we assume the SRAS is upward sloping, so stimulus creates some inflation even when in recession.

    Doc Merlin, Friedman said persistent inflation is a monetary phenomenon. In the short run he understood that the SARS matters, indeed he developed the natural rate model.

  29. Gravatar of Doc Merlin Doc Merlin
    15. November 2011 at 21:28

    @Scott:
    Ah, I thought we were talking about long/medium run. In the short run, I don’t think its impossible to understand exactly what’s happening in the general equilibrium. (This is why the fed keeps mistaking Supply shocks for excessively easy money)

  30. Gravatar of Doc Merlin Doc Merlin
    15. November 2011 at 21:29

    I should clarify. I mean in the data. I don’t mean in the models. Just not enough data in the short run.

  31. Gravatar of ssumner ssumner
    16. November 2011 at 16:38

    Doc Merlin, If it’s not impossible, why does the Fed mess up?

  32. Gravatar of Doc Merlin Doc Merlin
    16. November 2011 at 20:54

    “Doc Merlin, If it’s not impossible, why does the Fed mess up?”

    Sorry I mistyped, I meant “possible.”
    I don’t think its possible to distinguish in the short run.

  33. Gravatar of ssumner ssumner
    17. November 2011 at 19:02

    Doc Merlin, With NGDP you don’t need to worry about whetehr it’s supply shocks or not.

  34. Gravatar of The Libertarian: Why the Stimulus Failed The Libertarian: Why the Stimulus Failed
    11. December 2011 at 07:57

    [...] Library & Pub The End of Loser Liberalism: An Interview with Dean Baker Part II «  .. TheMoneyIllusion    » Lars Svensson, Market Keynesian Sunday Brunch « Witch's Will Welcome To My World –         [...]

  35. Gravatar of Forecast to Fail? « uneconomical Forecast to Fail? « uneconomical
    20. February 2012 at 14:25

    [...] Lars E.O. Svensson‘s “best practice” for inflation targeting is to target the forecast – to set the stance of monetary policy such that the forecast of the inflation rate remains on target, even if the current inflation rate deviates.  With the inclination towards market inflation forecasts (as opposed to some mathematical model), Scott Sumner dubbed Svensson a “Market Keynesian“. [...]

  36. Gravatar of J.V. Dubois J.V. Dubois
    26. March 2012 at 05:51

    Excellent article. Since most of the stuff is pretty clear for someone who read MM blogs during recent months, there was one part that caught my interest

    “The probability should then normally, specifically using symmetrical probability distributions, be roughly the same for later needing to raise or lower the repo-rate path”

    I read the very same thing about credit agencies assigning credit ratings for countries in this article: http://fivethirtyeight.blogs.nytimes.com/2011/08/08/why-s-p-s-ratings-are-substandard-and-porous/#more-14347

    The interesting part is this one: “According to the company’s internal analysis, once a country is downgraded it has a 52 percent chance of being downgraded again in the next two years. By contrast, there is just a 9 percent chance that S.&P. will reverse course and upgrade the country.”

    I assume that there generally exists objective bias against large changes even according to objective variables. It is similar to “social cost” issues for public facing people such as politicians. This means that public figures are rewarded if they stick to their (even wrong) opinions. Otherwise if they frequently revise their positions they may be considered as volatile, unprincipled. This might be a thing for psychologists – how to best design groups in order to minimize such behavior where personal pride and ego of 4 people may condemn billions into suffering.

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