Swedish central bankers and Korean ferryboat captains

For years I’ve been fighting against the (new) conventional wisdom in economics—that the 2008 crisis shows that monetary policy must move beyond macro stability, and focus on asset price bubbles. Unfortunately, Ambrose Evans-Pritchard reports that we seem to have achieved our first important success.  I say unfortunately, because it came at the expense of Sweden:

The Riksbank has been trying to “lean against the wind” to curb house price rises and consumer credit, pioneering a new policy that gives weight to the dangers of asset bubbles. But this is proving easier said than done without hurting the productive economy, suggesting that it may be better to use mortgage curbs or other means to rein in property mania.

But Jeremy Stein says that regulation doesn’t “get in all the cracks,” you need to smash asset price bubbles with a monetary sledgehammer.  Or like a tidal wave that gets in all the cracks of a leaky old boat. Here are the results:

Sweden has become the first country in northern Europe to slide into serious deflation, prompting a blistering attack on the Riksbank’s monetary policies by the world’s leading deflation expert.

Swedish consumer prices fell 0.4pc in March from a year earlier, catching the authorities by surprise and leading to calls for immediate action to avert a Japanese-style trap.

Lars Svensson, the Riksbank’s former deputy governor, said the slide into deflation had been caused by a “very dramatic tightening of monetary policy” over the past four years. He called for rates to be slashed from 0.75pc to -0.25pc to drive down the krona, and advised the bank to prepare for quantitative easing on a “large scale”.

Prof Svensson said Sweden was at risk of a “liquidity trap” akin to the 1930s, with deflation causing debt burdens to ratchet up in real terms. Swedish household debt is 170pc of disposable income, among Europe’s highest.

The former Princeton University professor wrote the world’s most widely cited works on deflation, his advice being sought by the US Federal Reserve’s Ben Bernanke during the financial crisis.

You can’t “get in all the cracks” without hitting AD hard.

And then after being warned by Svensson, and a wide range of bloggers from market monetarists to Paul Krugman, the Riksbank has the gall to claim no one could have foreseen it:

Sweden’s Riksbank admitted in its latest monetary report that something unexpected had gone wrong, perhaps due to a worldwide deflationary impulse. “Low inflation has not been fully explained by normal correlations between developments in companies’ prices and costs for some time now. Companies have found it difficult to pass on their cost increases to consumers. This could, in turn, be because demand has been weaker than normal,” it said.

Yes, and when that Korean captain ordered those 300 children to stay inside the ship as it was sinking, while he waltzed away, no one could possible have foreseen a bad outcome.  Right?

An exaggeration?  Of course.  But consider the following:

1.  The Riksbank was given a legal mandate to target inflation and unemployment, not asset price bubbles.

2.  For several years they have been explicitly ignoring this mandate.  They have set interest rates at a level so high that their own internal research unit has consistently predicted that they would fall short on both the inflation and employment front.  There’s no dispute about these facts.  The board included one of the world’s leading monetary experts, Lars Svensson, and a bunch of amateurs who are in completely over their heads.  They repeatedly ignored Svnesson’s warnings, even accusing him of being rude.  Eventually he got so frustrated with their incompetence that he resigned.

And now they claim no one could have foreseen this policy failure?

This is exactly what would have happened in the US in the mid-2000s if the Fed had tried to pop the housing “bubble.”  It’s exactly what did happen in 1929 when the Fed popped the stock price “bubble.”

Will this stop the bubblemongers?  Don’t count on it.  They are so convinced they are right that no amount of information will sway them.

If Sweden wants to regain its reputation for monetary policy excellence then they will fire the entire Riksbank board, put Svensson in charge, and give him a veto over any proposed additions to the board.

PS.  Of course it’s NGDP that really matters, not inflation.  Which is why market monetarists were ahead of the curve on these issues.  It really doesn’t make much difference if the ECB inflation rate is 0.5%, or 2.5%.  As long as NGDP growth in Europe is ultra-slow, the debt and jobs crises will continue.

PPS.  Lars Christensen linked to an excellent new paper by Clark Johnson, discussing Ben Bernanke’s take on the events of 2008.  Clark’s analysis is influenced by Keynes’s Treatise on Money.  (A better book than the General Theory.)

Bernanke reveals frustration that the Fed’s effort to lower long term rates did not bring recovery: “We have gotten mortgage rates down very low. You would think that would stimulate housing, but the housing market has not recovered.”

Bernanke scarcely regards the underlying monetary problem, which was the rise in systemic demand for money. His discussion in the following pages returns to the importance of targeting a low inflation rate – apparently through all phases of the business cycle – and the importance of letting financial markets know the central bank’s interest rate targets. These are the targets identified above as ill-chosen, and use of which Bernanke has himself criticized in the past.

.  .  .

In in pre-Fed writings, Bernanke acknowledged the ability of central banking to satisfy demand for liquidity, and thereby to boost demand for goods and services – even under extreme conditions. There is no evident reason why such methods would not work several years after a banking crisis, or for that matter, immediately after.

HT:  Paul Krugman



37 Responses to “Swedish central bankers and Korean ferryboat captains”

  1. Gravatar of Morgan Warstler Morgan Warstler
    19. April 2014 at 13:55

    This is only half true:

    “It really doesn’t make much difference if the ECB inflation rate is 0.5%, or 2.5%.”

    Yes, we have to hit NGDPLT, but I think you should should always qualify this sentence thusly:

    “Obviously, real growth 4.5% real growth is preferable to 4.5% inflation, but in the end, no matter what the basebeat of 4.5% NGDPLT has to hit like a atomic metronome.”

  2. Gravatar of Michael Byrnes Michael Byrnes
    19. April 2014 at 15:17

    A big problem: If monetary policy is tightened inappropriately, so as to pop bubbles, it will produce (what appears to be) evidence that there were bubbles that needed popping. This will happen whether or not there are any bubbles.

  3. Gravatar of Major_Freedom Major_Freedom
    19. April 2014 at 15:40

    Macro stability.


    Somebody explain to me why I should support the outcome of the government printing and spending an additional $100 billion on drones and boondoggles in response to private investment spending on tools and equipment falling by $100 billion, and why I should support this over the outcome of NGDP otherwise falling by $100 billion.

    If the answer is that there is no reason this should have to happen, then you’re dodging. If the answer is that NGDP is the standard, then you’re just saying murder and mayhem is better than unemployment of government workers. If the answer is that it’s OK to support the fall of NGDP of $100 billion, then NGDP really isn’t the standard, it’s something else.

  4. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. April 2014 at 15:49

    Sort of on target.

    Edward Lambert is puzzled why similar interest rate increases have had different effects in Sweden and Norway.



    Comparing Sweden & Norway on inflation
    By Edward Lambert

    “Paul Krugman has a post talking about how tighter monetary policy caused Sweden to go into deflation. Here is the chart showing their deflation.


    OK… we can see the deflation there far to the right. Paul Krugman talked about Sweden raising the interest rate to battle bubbles. Let’s look at the interest rate in Sweden.


    Yes, they certainly raised the interest rate. But didn’t Norway also raise their interest rate? Norway also has its own currency.


    Norway actually raised their interest rate higher and longer than Sweden. So I guess we would see deflation in Norway, right?


    Hmmmm, Norway has an inflation rate of 2.6%. OK, Mr. Krugman, what am I missing here? Your logic is not solid…”

    Paul Krugman:
    “But of course its own former deputy governor “” and my former colleague “” Lars Svensson, more or less frantically warned that the Riksbank was making a terrible mistake by tightening money despite low inflation and lots of economic slack.”

    How much economic slack is there in Sweden in Norway? The easiest way to measure this is by looking at the unemployment rate:


    Norway raised the key policy rate from 1.25% in October 2009 to 2.00% by May 2010 and later to 2.25% in May 2011, or an increase of 1.25 points over a period of 19 months. During that time the unemployment rate ranged from 3.2% to 3.7%.

    In contrast Sweden raised the repo rate from 0.25% in July 2009 to 2.00% by July 2010, or 1.75 points over a period of 12 months. During that time the unemployment rate ranged from 7.7% to 8.7%.

    Even when one takes into account the different measures of NAIRU the slack was still much greater in Sweden than in Norway. According to OECD estimates NAIRU was 7.2% in Sweden in 2009 and 2010 falling to 7.0% from 2011 on forward. NAIRU was 3.3% in Norway throughout. Thus unemployment was as much as 1.5 points higher than NAIRU when the repo rate was increased in Sweden but it was actually 0.1 points less than NAIRU during the first key policy rate increase in Norway.

    I think one also needs to keep in mind that the official inflation rate targets of Sweden and Norway are 2.0% and 2.5% respectively. During the time they raised their policy rates year on year core inflation ranged from 0.9% to 2.4% in Norway and from 0.8% to 1.2% in Sweden:


    So both countries were missing their target inflation rates, but Sweden was usually missing its target inflation rate by a larger margin.

    So when you combine that with the larger degree of slack, and the fact that the policy rate was increased by a larger margin in a shorter amount of time, Sweden’s monetary policy certainly looks much tighter that Norway’s during the period of interest rate increases.

  5. Gravatar of benjamin cole benjamin cole
    19. April 2014 at 15:50

    Scott Sumner: it is not economics that you are fighting, but deontology. Money must be tight, that is the rule.
    The rule comes first. Then reasons are supplied, as in QE causes hyperinflation, or it is inert, or deflationary or bubbley or portends mysterious and unforeseeable financial disasters….
    The rule says QE cannot work….
    BTW—why do people who otherwise worship free markets say that private investors become blubbering idiots and endanger the nation when interest rates are low?

  6. Gravatar of Kevin Erdmann Kevin Erdmann
    19. April 2014 at 16:17

    I hope you don’t mind, Michael Byrne. I reposted that at my blog. Exactly right.

    This is an area where EMH gets interesting. Clearly, the zeitgeist can revolve around self-reinforcing falsehoods. Markets probably perform better than the conscious consensus. But, it is tempting to think that positive NPV bets are available, even on the macro level, when suggestions that house prices were not out of line in 2006 are fairly universally treated as if they aren’t worthy of consideration.

    I think that in this comment section, we could get a decent consensus to agree that the Fed will be making some fairly predictable mistakes over the next 3 to 5 years. It will be interesting to see if those mistakes get fully priced in, a priori. I’ll try to have my bets in place.

  7. Gravatar of Major_Freedom Major_Freedom
    19. April 2014 at 16:34

    This is exactly what would have happened in the US in the mid-2000s if the Fed had tried to pop the housing “bubble.” It’s exactly what did happen in 1929 when the Fed popped the stock price “bubble.”

    Will this stop the bubblemongers? Don’t count on it. They are so convinced they are right that no amount of information will sway them.


    Pot, meet kettle.

    No socialist, including money socialists like market monetarists, have a leg to stand on in being that confident that their plan is the one that works and would have solved the problems of past socialist money activities.

    The MM interpretation of history is flawed because MM theory is flawed. Too much reliance on correlations without a theory of how the market works.

    Regarding the 2000s, you are, as always, ignoring the prior monetary policy activities that led up to that time.

    The reason the economy wide bubble was even a problem during the mid 2000s was precisely because the Fed took the MM advice and loosened dramatically after the 2001 correction! If the Fed did not accelerate inflation post 2001, then the correction during that time would have been steep for sure, but we would not have had the bubble we had by 2008 (assuming the Fed was also abolished and not in a position of making the bubble worse). We had a bubble as big as it was because of MM style actions by the Fed prior. Every time, the Fed has to do more.

    Since the Fed again reinflated post-2008 (it is irrelevant that it wasn’t as much as you wanted), it made the economic bubble even bigger. It is false, as false as false can be, to reason that because price levels or aggregate spending levels are modest, that it means the central bank is not blowing up any economic bubble that will inevitably correct. Braindead economists during the 1920s made the same mistake as you. They believed that because prices were not rising all that much, that the central bank wasn’t causing any major problems during that time. They didn’t understand the real side problems building up because they lacked the proper theory to understand what was going on.

    You’re fighting a battle that you can’t win, because it isn’t just people’s opinions you’re clashing against, but economic reality. Nobody can win that battle. Not even the version of (monetary) socialism called market monetarism can win that battle.

    Right now the economy is more messed up than it has ever been, because of many years of the Fed avoiding any significant corrections due to their own past activities.

    Falling unemployment and rising output now are not reliable signs that all is well in the money production front.

  8. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. April 2014 at 17:15

    More on Sweden and Norway.

    To see why interest rate policy has resulted in accelerating inflation in Norway and deflation in Sweden it might be useful to look at some Taylor Rules.

    The following are the 1999 version of the Taylor Rule with twice the weight on output gap as the inflation target gap. They take into account that Sweden’s inflation target (2.0%) is different from Norway’s (2.5%) and use core inflation. The output gap is measured using a post-1995 Okun’s Law coefficient from Laurence Ball’s paper “Okun’s Law: Fit at Fifty?” and the gap between the OECD NAIRU and the harmonized unemployment rate.

    Here is Sweden first. The blue line is the 3-month interbank rate and the red line is the Taylor Rule. (Sweden’s 3-month interbank rate is slightly below the repo rate.):


    Note that in July through December 2010 when Sweden did its first four interest rate increases, the Taylor Rule prescribed a negative policy rate. And in January through July 2011 during the remaining three interest rate increases the Taylor Rule continued to prescribe a rate over a point below the rate adopted by the central bank.

    Since May 2012 the Taylor Rule has always been negative and the gap between it and the actual policy rate grew much larger through the middle of 2013. Consequently unemployment rose from 7.5% in April to 8.4% in November 2012, and Sweden’s unemployment rate has been consistently above its NAIRU of 7.0%-7.2% since February 2009.

    In short, interest rate policy has been consistently too tight since Sweden ended QE and left the zero lower bound in July 2010. Thus it’s no surprise what had been one of the best performing economies in the EU in 2009-2010 is now entering full blown deflation.

    Now let’s take a look at Norway. The blue line is the 3-month interbank rate and the red line is the Taylor Rule. (Norway’s 3-month interbank rate is slightly above the key policy rate.):


    Note that in October and December 2009, when Norway did its first two interest rate increases the Taylor Rule prescribed a policy rate even higher than what was adopted. Only in the case of the May 2010 and May 2011 interest rate increase was the Taylor Rule below the actual policy rate, and never by more than 0.9 points at the time of the increase.

    And since January 2012, apart from November 2012 through May 2013, a period of 7 months, the Taylor Rule has almost always been above the actual policy rate. This is partly attributable to the fact that Norway’s unemployment rate was at or below its 3.3% NAIRU for the entire 12 month period from November 2011 through October 2012, dropping as low as 3.0% in March and April 2012.

    Thus the period of tightening was much less of a policy error in Norway’s case than Sweden’s. And for over two years now Norway’s monetary policy has been generally on the expansionary side. It’s no wonder that Norway’s inflation rate has accelerated to the point that it is now roughly on target.

  9. Gravatar of BC BC
    19. April 2014 at 17:22

    Major_Freedom, you should support NGDP targeting because it is the least distortive policy given that the government has a monopoly over the fiat money supply. We would all prefer that the market, rather than the government, set the supply of corn, but if the government did set the supply of corn, then it would be less distortive to set it as close as possible to where the market would have set it rather than to keep the supply fixed or growing at a constant rate. Market supply and demand for corn fluctuate.

    Market demand for money also fluctuates. If market demand for corn was higher than government-set supply, then the price of corn would rise to adjust. When market demand for money is higher than government-set supply, then the value of money must rise. Since money is the medium of account, its nominal value is fixed. So, the value of money rises when the general price level of everything else falls. But, because some prices like wages are sticky, in those sticky-price markets quantities fall instead of prices. Thus, NGDP falls. So, falling NGDP indicates that the government has set money supply in the wrong place and, instead of just the value of money changing to adjust for that, real quantities of goods were affected, i.e., the government mismanagement of its fiat money monopoly caused distortions.

    The most hands-off monetary policy would be for the government to let the market set money supply through an NGDP futures market. In the absence of such a market, the next best thing would be for the government to try to set money supply where the market would have, i.e., by targeting stable NGDP. Keeping money supply fixed or growing at a constant rate and ignoring money demand is not a hands-off policy; it’s a distortive policy.

  10. Gravatar of Morgan Warstler Morgan Warstler
    19. April 2014 at 18:14

    BC, is of course correct.

    MF’s position should be, “Even though I would prefer an Austrian solution, NGDPLT is better than what we have now.”

    Some people say the glass is half full, some people say the glass is half empty… but we all know it is half empty.

  11. Gravatar of TallDave TallDave
    19. April 2014 at 18:24

    O/T: This is probably good news for China, one of those trends the chattering classes don’t pay enough attention to. Asians everywhere are quickly becoming Christians, and primarily Protestants, which has some interesting implications that haven’t been talked about much. It will be very interesting to see what particular forms Chinese Christianity takes.

  12. Gravatar of Major_Freedom Major_Freedom
    19. April 2014 at 21:06


    “Major_Freedom, you should support NGDP targeting because it is the least distortive policy given that the government has a monopoly over the fiat money supply. We would all prefer that the market, rather than the government, set the supply of corn, but if the government did set the supply of corn, then it would be less distortive to set it as close as possible to where the market would have set it rather than to keep the supply fixed or growing at a constant rate. Market supply and demand for corn fluctuate.”

    But that’s just it BC. NGDPLT is not closest to the market.

  13. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. April 2014 at 21:06


    In my first comment at “19. April 2014 at 15:49”

    The following:

    “In contrast Sweden raised the repo rate from 0.25% in July 2009 to 2.00% by July 2010, or 1.75 points over a period of 12 months. During that time the unemployment rate ranged from 7.7% to 8.7%.”

    Should read:

    “In contrast Sweden raised the repo rate from 0.25% in July 2010 to 2.00% by July 2011, or 1.75 points over a period of 12 months. During that time the unemployment rate ranged from 7.7% to 8.7%.”

  14. Gravatar of Major_Freedom Major_Freedom
    19. April 2014 at 21:14

    This is what fiat money has done:


  15. Gravatar of Tom Tom
    19. April 2014 at 22:31

    “Of course it’s NGDP that really matters, not inflation”

    Scott I didn’t see any NGDP stats for Sweden in your post – only the CPI data. (There weren’t any NGDP stats in the Pritchard piece either) It looks like the Q1 14 data is not out until end of May and Q3 13 and Q4 13 NGDP growth was decent – the falling general price level hit in January.

  16. Gravatar of Daniel Daniel
    20. April 2014 at 01:39

    Apparently, fiat money causes “income inequality” now.

    Austrians – saying dumb crap since 1949 (at least).

  17. Gravatar of ssumner ssumner
    20. April 2014 at 04:50

    Mark, I see he’s at it again.

    TallDave, That’s not really news, but it is an important trend. Too early to know the implications.

    Tom, I don’t have the Swedish data, but I recall that NGDP grew fast in the initial stages of the recovery, and much slower since then. Do you have a link?

  18. Gravatar of Major_Freedom Major_Freedom
    20. April 2014 at 04:52


    Fiat money has always caused income inequality. It isn’t new. The whole point of it to increase inequality, for the sake of power over others.

    The government and bankers created the central bank so that the government can collect more taxes and spend more money, and for the bankers to be able to lend more (especially to the government) and make more interest.

    Nobody else other than government and bankers are acquiring this money.

    When the central bank inflates, it does not send checks to every single individual. No, it continually sends them to the bankers.

    If you can’t grasp how that increases income inequality, then you’re lost.

  19. Gravatar of Major_Freedom Major_Freedom
    20. April 2014 at 04:54


    You see an increased income only after their income has risen, and only after they spend and invest the additional money. But by that time, they’d have already benefited in real terms while you did not.

  20. Gravatar of Morgan Warstler Morgan Warstler
    20. April 2014 at 06:12


    In 100 years when the history of the world is written, they will look at either 1979 and then 1994, and delineate a new calendar.

    Right now we think in before and after christ.

    In the future we will think of before and after digital networks.

    What will be meaningful to a future society that lives virtually? Religion? No.

    They will note the caveman years when there were no digital networks, when the electrical impulses of the brain required EXTERNAL SENSES, when ATOMS were the way of the human progress.

    50K years of atomic economy based on scarcity, and then POOF! everyone just JACKED in and their brain consumed, their person experienced UNLIMITED things.

    And that graph will be used over and over again, and understood for what it was, a time when “wealth” was still valued in atoms, and then the rules of the game changed, the poles of the earth literally switched.

  21. Gravatar of Daniel Daniel
    20. April 2014 at 06:17

    Major_Fruitcake definitely has more than a few nuts and bolts missing, but I see Morgan is trying hard to catch up.

  22. Gravatar of Noah Smith Noah Smith
    20. April 2014 at 09:33

    Great post. I agree that using monetary policy to pop bubbles is highly unlikely to work.

  23. Gravatar of Tom Tom
    20. April 2014 at 09:50

    Obviously having trouble reading my graphs. Q4 2013 data was decent at 4.2%. Average NGDP growth between 2001 and 2005 was 4.4%. Oxford Economics are forecasting 3.2% NGDP growth for 2014 with a weak Q1 number expected at 2.6%.

    Q2 2012 2.19
    Q3 2012 1.76
    Q4 2012 2.83
    Q1 2013 2.13
    Q2 2013 1.56
    Q3 2013 2.47
    Q4 2013 4.19

  24. Gravatar of TravisV TravisV
    20. April 2014 at 15:10

    Prof. Sumner,

    Clark Johnson wrote the following (in the paper you linked to):

    “I believe Bernanke means that QE would lower real long-term rates. According to market participants, Fed QE announcements tend to raise inflationary expectations, thereby raising nominal rates on 10- and 30-year bonds.”

    I think this deserves more discussion from you. In particular:

    (1) Do you personally believe that QE3 has put downward pressure on real long-term interest rates (seems doubtful to me)?

    (2) Has Bernanke or anyone else on the FOMC EVER distinguished between the effect of QE on nominal rates vs. its effect on real rates?

    It sure seems like there’s very little actual evidence supporting Clark Johnson’s argument above. Why do Bernanke and Yellen keep saying that QE lowers long-term rates even though the truth is closer to the opposite? My theory: they say it because it sounds more appealing than “increase expectations of future inflation.” It’s all about selling the QE approach in a way that the general public feels like they understand (even though they don’t).

  25. Gravatar of ssumner ssumner
    20. April 2014 at 16:31

    Tom, The NGDP numbers are too low, but certainly not as bad looking as the CPI inflation.

    Thanks Noah.

    Travis, As I’ve watched policy over the years, there doesn’t seem to be any consistent pattern between monetary policy and rates. Sometimes stimulus lower rates and sometimes it increases them. All we really know is that extreme stimulus (creating lots of inflation) will raise rates.

  26. Gravatar of TravisV TravisV
    20. April 2014 at 16:40

    Prof. Sumner,

    Are you referring to nominal interest rates or real interest rates?

  27. Gravatar of Cory Cory
    20. April 2014 at 16:59

    Benjamin Cole,

    You said this:

    “Scott Sumner: it is not economics that you are fighting, but deontology. Money must be tight, that is the rule.”

    And it is pure gold. I could never have summed it up so succinctly. Monetary Puritans are bringing the world to its knees under a veil of ignorance.

  28. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. April 2014 at 17:41

    Since the Swedish deflation is the result of tight monetary policies supposedly designed to restrain the growth of debt, specifically household debt, I thought it might be useful to take a closer look at Sweden’s leverage rates by sector. But before I do that let’s review how good Sweden’s monetary policy was before the Riksbank decided to ignore the counsel of Lars Svensson and ruin everything.

    Here’s a graph of NGDP for Sweden, Denmark, the US and the Euro Area since 2007. It is indexed to 100 in 2007Q3.


    The only EU member that escaped recession in 2008-09 was Poland. Sweden had a recession but it was the mildest of any EU member that did. What both of these countries had in common was flexible exchange rates. Denmark by contrast is pegged to the euro.

    Between August 2008 and March 2009 the kronor depreciated by about 16% relative to the euro. The fact that Sweden’s NGDP only fell 4.4% peak (2008Q3) to trough (2009Q1) instead of 7.8% like Denmark is directly attributable to this fact. The Swedish Riksbank was unconstrained by the requirement of maintaining an exchange rate peg when the crisis hit and so was free to pursue a more expansionary monetary policy than the Danish National Bank.

    Note also that Sweden opened up a very wide lead in NGDP with respect to the other currency areas between 2009Q4 and 2010Q4. NGDP grew by 13.4%, 6.9%, 6.9% and 11.2% in 2010Q1 through 2010Q4 respectively. Thus NGDP soared by 9.6% year on year between 2009Q4 and 2010Q4.

    The Riksbank increased its monetary base by more than the Fed early on in the crisis. By October 2008 it was already 121% larger than in August compared to 25% for the Fed. By December 2008 it was 225% larger compared to 101% for the Fed. However, unlike the Fed which moved to a zero interest rate policy by December 2008, the Riksbank did not lower its repo rate to 0.25% until August 2009, and only kept it at this rate through June 2010.

    Although the Riksbank was slower to move to ZIRP, during this time it maintained a (-0.25%) deposit rate, the first central bank to institute a negative interest rate, and the monetary base was maintained in the range of 270% to 350% larger than it had been in August 2008. In contrast the Fed was paying (+0.25%) on reserves and the monetary base was only 100% to 140% larger than it had been in August 2008 during this period.

    Starting in July 2010 the repo rate was raised in quarter point increments until it reached 2.00% in July 2011 where it remained until December 2011. And by January 2011 its monetary base was reduced to only 2% more than it had been in August 2011. Since then the Riksbank was eased somewhat, with the monetary base now back up to 23% larger than it was in August 2008, and the repo rate having been reduced to 1.00% by December 2012, and to 0.75% in December 2013.

    Consequently, between 2010Q4 and 2013Q3 Sweden’s NGDP only grew at an average rate of 1.7% annually. This is barely faster than the 1.6% and 1.3% rate it averaged in Denmark and the Euro Area respectively, and it is dramatically slower than the 3.9% rate it averaged in the US.

    So, with that monetary policy review out of the way, how did Sweden’s debt leverage rates perform during this time period?

    The endless refrain I hear from commenters in the econblogosphere is that expansionary monetary policy leads to increased private sector leverage. If this is true then obviously we should have seen a huge increase in private sector leverage during the period of ZIRP and QE and then a reduction in leverage levels since ZIRP and QE were ended.

    So let’s take a look.

    Here’s loans and securities other than shares as a percent of GDP by sector. All data comes from the ECB Statistical Warehouse and Eurostat.


    Notice that, apart from the general government sector, debt leverage increased in 2007, 2008 and most of 2009. This shouldn’t be that surprising, as there was a recession in 2008, and NGDP actually fell in 2008Q4 and 2009Q1. Nonfinancial corporation sector and total leverage peaked in 2009Q3 and household sector leverage peaked in 2009Q4. Financial corporation sector leverage peaked in 2010Q1 although this was only a hair’s breadth higher than it had been in 2009Q3.

    But between 2009Q3 and 2010Q4, nonfinancial corporation sector leverage declined by 11.5%, and between 2010Q1 and 2010Q4 financial corporation sector leverage declined by 11.6%. Consequently total leverage declined by 8.6% between 2009Q3 and 2010Q4. Recall that this period overlaps very nicely with the time when NGDP was soaring, which in turn overlaps very nicely with the time that the repo rate was 0.25%, the deposit rate was (-0.25%) and the monetary base was up 350% from its level in August 2008.

    And what has happened since then, during the time the Riksbank unwound QE and cranked up interest rates?

    Well, leverage in every sector rose between 2010Q4 and 2013Q3, with household sector leverage setting new records since 2011Q4. But given NGDP is the denominator in sector debt leverage, and NGDP growth has been relatively poor since 2010Q4, this really shouldn’t come as such a surprise.

    That is, of course, unless you are one of the legions of debtphobes, which evidently includes the people currently running the Riksbank, who for some inexplicable reason are convinced expansionary monetary policy causes debt leverage to increase.

    You would think with rapidly declining debt leverage in countries that have done QE, such as the US and the UK, and with debt leverage at or near record levels in the Euro Area where no QE has ever been done, and with the horrible laboratory experiment of Sweden as a cautionary example, people would get by now that contractionary monetary policy raises debt leverage and expansionary monetary policy reduces debt leverage. But evidently there’s no accounting for very slow learners.

  29. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. April 2014 at 18:26

    Off Topic.

    I’m not sure if you’ve seen this yet.


    “David Beckworth stated on Twitter that Market Monetarists “knew all along inflation would not be a problem”. It’s true. The Market Monetarists have long been predicting low inflation and even deflation. See this 2009 piece by Scott Sumner titled “Deflation is our Biggest Worry – Not Inflation”. So yes, the Market Monetarists nailed this one, right? Not so fast…”

    “…This is obviously a misinterpretation of the money multiplier and it’s based on an incorrect causal understanding of bank reserves and the lending process. More recently, there’s been some revisionist history on this concept. Obviously, the 2009 Scott Sumner believed in the Money Multiplier and the myth that banks “lend out” reserves. But since the Bank of England demolished that myth the story changed. 2014 Scott Sumner says the Money Multiplier is still valid, but simply represents a ratio instead of a causal relationship in the lending process…”

    “…But it’s also crystal clear that some other components of the reasoning for low inflation were based on a total misunderstanding of how modern banking works. And so the conclusions were right, but not entirely for the right reasons. And this again, proves why understanding the modern monetary system is so important.”

    Says the guy who didn’t know the Fed doesn’t pay face value to the Treasury for notes.

  30. Gravatar of kptsmplstpd kptsmplstpd
    20. April 2014 at 23:55

    Riksbank has no mandate to target the unemployment rate as in US.

  31. Gravatar of Michael Byrnes Michael Byrnes
    21. April 2014 at 03:19

    Noah wrote:

    “Great post. I agree that using monetary policy to pop bubbles is highly unlikely to work.”

    Speaking of great posts, I thought your short comment on infation was fantastic!


  32. Gravatar of TravisV TravisV
    21. April 2014 at 04:38

    Brad DeLong replies today to Sumner:

    “Could We Have Had a Severe Recession Without the 2008 Financial Crisis?”


  33. Gravatar of ssumner ssumner
    21. April 2014 at 05:40

    Travis, Both.

    Mark, Thanks, very interesting data on Sweden.

    And I see that Cullen Roche is still mischaracterizing my views. Nothing new.

    kpts, Why does Svensson say they have a dual mandate?

  34. Gravatar of TravisV TravisV
    21. April 2014 at 07:15

    Which hypothetical president would do a better job with the Fed: Rick Perry or Paul Ryan?

    “Rick Perry’s extreme makeover”


  35. Gravatar of TravisV TravisV
    21. April 2014 at 07:28

    Clive Crook criticizes Piketty and Ryan Avent responds to Crook:


  36. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. April 2014 at 09:48

    “Riksbank has no mandate to target the unemployment rate as in US.”

    My goal in constucting Taylor Rules for Sweden and Norway was to demonstrate that monetary policy stance was tighter in Sweden than in Norway, and thus the fact that Sweden is experiencing deflation, and that Norway is attaining its inflation target, were entirely explainable. It’s not at all unusual to use a Taylor Rule when discussing monetary policy stance in the context of interest rate policy, even when the central bank has no employment mandate.

    However, when you imply that the Riksbank has no employment mandate, are totally incorrect.

    Yes, Sweden has an inflation rate mandate. But it is a *flexible* inflation rate mandate, and as Lars Svensson has pointed out many, many times, the government bill that proposed the Sveriges Riksbank Act states that quite clearly “as an authority under the Riksdag, the Riksbank, without prejudice to the inflation target, should furthermore support the goals of general economic policy with the aim to achieve sustainable growth and *high employment*.” Page 1. (Sorry, no translation.)


    “High employment” should be interpreted as the highest sustainable rate of employment which, given the inflation rate target, may be construed as being equivalent to an unemployment rate equal to NAIRU.

    So, in short:

    1) By Sweden experiencing outright deflation, which is obviously far short of the Riksbank’s explicit 2.0% inflation target, the Riksbank is failing to meet its “price stability” mandate.
    2) By Sweden experiencing rising debt leverage ratios, the Riksbank is failing to meet its “financial stability” mandate.
    2) By Sweden experiencing an unemployment rate of 8.0% compared to its NAIRU of 7.0%, the Riksbank is failing to meet its “high employment” mandate.

    In the show business of central banking, this is known as a “triple threat”:


  37. Gravatar of TravisV TravisV
    21. April 2014 at 18:25

    Tyler Cowen makes an excellent point about Piketty:


    “5. Piketty converts the entrepreneur into the rentier. To the extent capital reaps high returns, it is by assuming risk (over the broad sweep of history real rates on T-Bills are hardly impressive). Yet the concept of risk hardly plays a role in the major arguments of this book. Once you introduce risk, the long-run fate of capital returns again becomes far from certain. In fact the entire book ought to be about risk but instead we get the rentier.”

Leave a Reply