Sweden shuns the euro, depreciates in the crisis, and avoids a PSST problem

Here’s BloombergBusinessweek, with a picture for those too lazy to read:

They are taking to the streets in Stockholm, but not with demands. Swedes, this month, ask for no more than a spare patch of grass or dockside granite to bask in the midsummer. The country has never really gone in for protest anyway, and right now there’s nothing to protest about. The economy grew at an annual rate of 6.4 percent in the first quarter, after 5.7 percent last year, which was the strongest recovery in the European Union. And Sweden still has its krona.

Australia is another success story.  It maintained a higher trend NGDP growth rate than other countries during the pre-crisis period, which meant higher trend nominal interest rates.  During the crisis it was able to cut rates from 7% to 3%, and avoid a liquidity trap.  No PSST problem in Australia either.  Ditto for Poland.  Interesting that countries that avoid PSST problems are pretty much the same as countries that avoid excessively tight money.


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9 Responses to “Sweden shuns the euro, depreciates in the crisis, and avoids a PSST problem”

  1. Gravatar of effem effem
    7. July 2011 at 16:12

    Switzerland and Germany have had equally good (perhaps better) employment outcomes with strong (very strong in the case of Switzerland) currencies.

    Also, looks to me like real short-term yields have been identical in each of the countries since the crisis. Why do you say Sweden has been easier with money?

  2. Gravatar of ssumner ssumner
    7. July 2011 at 17:11

    effem, I am pretty sure that Sweden’s real GDP growth has been much higher than those two countries, at least for 2010, and the expected growth rates for 2011 and 2012 are also considerably higher according to the Economist magazines’ consensus survey.

    Germany was able to achieve stable employment with a huge drop in RGDP by job sharing, which is a completely separate issue. I’d want to see which countries did better in terms of hours worked.

    BTW, The Swiss central bank prevented the franc from appreciating during the worst of the recession, so it was held down relative to where market forces wanted to push it. As Switzerland recovered they let it rise.

    Having said all that, I agree that the two countries you mention have done relatively well. I think it is partly the result of labor market reforms in Germany, which held down wages relative to other EU countries, and also partly because they produce capital goods that are highly valued in the booming developing world. I would never deny that these factors are also important, and never claim that easier money is the sole explanation for Sweden’s success.

    Keep in mind that Sweden is just one data point in an argument that goes all the way back to the 1930s, when recoveries typically began with devalution, and as I said also includes places like Poland.

    Also note that Sweden did better than Denmark, a similar Nordic economy that did not devalue.

  3. Gravatar of Doc Merlin Doc Merlin
    7. July 2011 at 17:37

    This is why free banking is such a good idea. As demand for money grows (shrinks), supply for money should also grow(shrink), the modern centrally planned system doesn’t really manage that very well, but imo free banking would.

  4. Gravatar of The Evidence that Austrians Need to Take QE3 Seriously « Increasing Marginal Utility The Evidence that Austrians Need to Take QE3 Seriously « Increasing Marginal Utility
    7. July 2011 at 18:34

    [...] the theoretical framework for why Hayekians should take quantitative easing seriously. Today, Scott Sumner pithily gives the empirical evidence. After showing that Sweden devalued itself enough to get back to NGDP trend, he writes, Australia [...]

  5. Gravatar of engineer27 engineer27
    8. July 2011 at 07:04

    So, even if you believe that establishing new PSSTs is the key to long-run economic recovery, it is much easier for participants to discover new profitable PSSTs when there is adequate money supply, sufficiently high “velocity”, and rational wage and price levels. Stunning.

    Also, your favorite NYT columnist points to Argentina as an example of currency depreciation presaging a boom: http://krugman.blogs.nytimes.com/2011/06/23/dont-cry-for-argentina/

  6. Gravatar of Scott Sumner Scott Sumner
    8. July 2011 at 12:31

    Doc Merlin, Free banking might do that, but there is no proof it would be in such a way as to preserve macroeconomic equilibrium. Banks would maximize profits, a different issue.

    Engineer27, Not stunning to you and I and Krugman, but very few people understand this–certainly not policymakers. You do realize that Krugman and I have similar views on monetary policy, don’t you?

  7. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. July 2011 at 18:19

    Bloomberg Businessweek:

    “The economy grew at an annual rate of 6.4 percent in the first quarter, after 5.7 percent last year, which was the strongest recovery in the European Union.”

    Kudos to you Scott for mentioning Poland but I’m mortified that Bloomberg Businessweek could make such a misleading statement. You can’t have a strong recovery after all if there is nothing to recover from.

    Poland is the only EU member not to have a recession. It had one quarter of negative growth (2008Q4) when RGDP declined 0.4%. In contrast in Sweden RGDP declined a total of 7.6% between 2007Q4 and 2009Q1.

    In the 13 quarters since 2007Q4 Poland’s RGDP has increased by 10.6% or at an average annual rate of 3.2%. In contrast over the same time period Sweden’s RGDP has increased a paltry 1.2% or at an average annual rate of 0.4%.

    Of course of the six flexible exchange rate members of the EU Poland depreciated the most with respect to the euro between July 2008 and February 2009, or by 29.9%. In contrast Sweden only depreciated by 13.3% over the same time period.

  8. Gravatar of Scott Sumner Scott Sumner
    10. July 2011 at 06:52

    Mark, Yes, I also noticed that oversight.

  9. Gravatar of Nearly Everything Kling Says I Agree With « Increasing Marginal Utility Nearly Everything Kling Says I Agree With « Increasing Marginal Utility
    15. August 2011 at 11:09

    [...] I were looking at the US alone, I would have come to the same conclusion as Kling. But, per Sumner, PSST becomes much less convincing when you look at different countries. 4. It also could be that inflation cannot be fine tuned. That is, when inflation starts to rise, [...]

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