Another Market Monetarist Advisory
A few weeks ago I alerted readers to NGDP Advisers, which features Marcus Nunes, James Alexander, Benjamin Cole and Justin Irving. Now we are about to see another MM advisory firm. Lars Christensen will launch Markets and Money Advisory early next year. Lars has a new post on the Riksbank, which provides an example of the sort of analysis he will be doing:
Believe it or not – there is a country in the world where I now believe that monetary policy is becoming (moderately) too easy. Yes, that is correct – I will not always say that monetary policy is too tight. The country I talk about is Sweden. More on that below.
Assessing monetary conditions
I strongly believe that the assessment of the monetary stance of a country should not be based on for example looking at the level of nominal interest rates, but rather on whether or not the country is on track to hitting the central bank’s nominal target in lets say 12-18 months.
A way of assessing that is of course to look at market inflation expectations (if the central bank targets inflation as in the case of Sweden’s Riksbank). If inflation expectations are below (above) the target (for example 2%) then monetary conditions are too tight (easy).
An alternative to this approach is to look at other monetary indicators – for example money supply growth, nominal GDP growth, interest rates and the exchange rate. And this is exactly what we are doing in our (Markets & Money Advisory’s) upcoming publication on Global Monetary Conditions.
Policy consistency
Hence for all of the nearly 30 country we analyse in the publication we look at the four monetary indicators mentioned above and compare the development in these indicators with what we believe would be consistent with the given central bank’s inflation target.
I don’t know enough about Sweden to comment, but it certainly is an interesting case. Here’s Bloomberg:
As the Brits worry about the ramifications of a weakening pound, Sweden’s central bank has happily driven down its currency to the lowest level in more than half a decade.
Defying fundamentals – strong economic growth, a big current account and trade surplus and rising employment – the Swedish krona was the second-worst performing currency in the world last month after the British pound.
Those “fundamentals” may be interesting, but they are not the sort of fundamentals that a central bank should focus on. Instead, inflation and NGDP growth are what matter. Just because you have a big current account surplus does not mean that money is too easy. Indeed Japan experienced both deflation and a CA surplus at the same time. Sweden’s surplus merely reflects its high saving rate; it tells us nothing about whether the exchange rate is at the wrong level. For that, you need to look at NGDP growth. Thus the Japanese yen is too strong because NGDP growth is too slow. Lars suggests that Sweden’s NGDP growth is excessive, and that’s why he thinks they are too easy right now.
Sweden has other important lessons. Compared to Denmark (4.2%) and Norway (5.0%), Sweden has a rather high unemployment rate–currently 6.6%. But that probably reflects a higher natural rate of unemployment, which cannot be fixed with monetary policy. Again, monetary policy cannot be used to “solve problems”—instead it should aim at steady NGDP growth rates to avoid creating problems. But don’t go to the other extreme and “oppose monetary policy”. There is no such things as not using monetary policy, and any attempt to refrain from using it will merely create bad (highly unstable) monetary policy. I say this because I’m seeing this mistake more and more often. This headline made me cringe:
Buiter: Forget Monetary Policy, It’s Had Its Day
Yes, and eating food won’t solve your problems, so STOP EATING FOOD YOU IDIOT!
Or perhaps I should say. “You may not care about monetary policy, but monetary policy cares about you.”
PS. The Bloomberg article on Sweden suggests that current policy is turning the krona into “play money”. That might be a bit strong, given that Sweden’s inflation rate is currently 1%. That’s a tad below Zimbabwe 2008 levels.