Will those &%$#@& ever learn?

And now Sweden is reversing course and cutting rates, just another sorry example to add to our earlier list of premature ejections from ultra-low rates:

1.  In 1936 and 1937 the Fed raised rates slightly via higher reserve requirements.  Fed minutes show that by late 1937 they realized they’d made an awful mistake, but were unwilling to accept blame.

2.  In 2000 the BOJ raised rates, despite there being no inflation in Japan.  This disproved Krugman’s expectation trap theory, which argued the Japanese wanted to inflate, but just couldn’t get the hang of it.   Soon after the BOJ had to do a humiliating about face.

3.  In 2006 the BOJ raised rates and cut the monetary base by 20% despite no inflation, completely demolishing what was left of Krugman’s expectations trap argument for Japanese deflation.  Later the BOJ had to cut them back to zero again—and still no inflation.

4.  In the spring of 2011 the ECB raised rates twice, and soon after Europe plunged into a double dip recession.  Trichet wouldn’t admit his error, and Europe had to wait for a new ECB leader to do the humiliating about face.

5.  And now Sweden.  The Riksbank had raised rates steadily from mid-2010 to mid-2011, as Sweden was recovering faster than other European countries.  But being at the zero bound is kind of like lying in bed for a few days with a serious illness.  You start to feel fine and want to go out and play a game of golf.  But you weren’t really recovered and the exertion causes a relapse.

Here’s what happened in Sweden:

According to the National Accounts, GDP fell by 4.6 per cent in the fourth quarter, when calculated as an annual rate. Compared with the fourth quarter of 2010, GDP only increased by 1.1 per cent. The outcome was much weaker than anticipated.

So the Riksbank had to back-peddle, and cut rates in December 2011 and February 2012.  But as Lars Svensson points out, not enough:

The repo-rate path in the main scenario has been lowered compared with December, but according to these diagrams it has not been lowered enough to best stabilise inflation and resource utilisation. 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 fulfillment for both inflation and unemployment. Monetary policy is therefore not well balanced in the main scenario, according to Mr Svensson. He does not think that it is necessary to be an expert on monetary policy to realise this.

.   .   .

The section “Alternative scenarios for the repo rate” in Chapter 2 of the draft Monetary Policy Report includes several lines of argument for why the red repo-rate path should be better than the blue one. Mr Svensson said he found these lines of argument strange. One argument drifts back and forth between CPI and CPIF inflation. Having several targets and switching emphasis between these different targets from time to time is a well-known way of justifying a specific policy that is desired for other, unstated reasons, Mr Svensson pointed out.

.   .   .

According to Mr Svensson, a large and serious problem in the decision-making process is that, in practice, there is no scope for a serious, in-depth discussion of different policy alternatives. There should be at least two alternative repo-rate paths with attendant carefully-analysed forecasts for inflation and resource utilisation, together with discussions of target fulfillment for the various alternatives. Without this, the decisionmaking material is insufficient. How can the members of the Executive Board take reasonable decisions if the consequences of the alternative repo-rate paths have not   been properly examined?

Does any of that make you think of the Fed?  In contrast to Svensson’s razor-sharp logic, the hawks on the committee just talk in vague generalities, relying on hunches rather than clear and transparent reasoning.

Paul Krugman keeps saying that surely it should count for something if one has been consistently right.  Svensson has been consistently right about Swedish monetary policy, and yet he still can’t get a majority of the Board to listen to him.

Lars Svensson’s views are close to those of Ben Bernanke, which makes me think that what Svensson says is what Bernanke really thinks.   Recall how Bernanke keeps saying that monetary policy in the US is extraordinarily accommodative, despite the fact that his own 2003 criteria for judging the stance of monetary policy suggests it’s the tightest since Herbert Hoover was president.  Here’s how Svensson sees things:

Mr Svensson pointed out that, while the real interest rate is very low in a historical perspective, Figure 3 of the figure supplement he handed out shows that the nominal interest rate is historically high in relation to foreign interest rates. Furthermore, it is not obvious how we can measure how expansionary monetary policy is. It could be maintained that the most relevant measure is the gap between the real policy rate and the neutral interest rate, where a practical definition of the neutral interest rate could be the real interest rate that leads to a sustainable level of resource utilisation within a certain period, for example one year. According to Mr Svensson, the neutral interest rate is apparently very low and negative in Sweden, Europe and the United States.

If one reads the entire 32 page document, one can’t help thinking about Noah Smith’s recent post.  Noah discussed some ideas like inertia, and fear of risking your reputation by taking bold action.  But those don’t really fit Sweden very well, as the hawks sharply raised rates between mid-2010 and mid-2011.  But this comment from Noah perfectly fits the February 2012 Riksank report:

Why are all these people arguing for things like hard money and austerity? Do they believe in some model – some RBC variant, perhaps – that tells them that now is not the time for quantitative easing and fiscal stimulus? If so, they aren’t publicizing the fact. My guess is that it’s not really about models and theories at all – policymakers and pundits basically don’t buy into any macro model, and so are falling back on their own reflexive intuition.

For three years I’ve been arguing that this crisis was a disaster produced by macroeconomic policy makers relying on common sense rather than rigorous models and hard logic.  Now I am more convinced than ever.

PS.  You might wonder if a central bank ever waited too long to raise rates above the zero bound.  Yes the Fed in 1951, when they let inflation rise sharply.  But we aren’t even close to that scenario, and that inflation spike was quickly extinguished.

HT:  I thank Stefan Elfwing for the very helpful documents from the Riksbank.  He indicated that the right-leaning appointees opposed Svensson.  The Swedish right has done a great job fixing the structural problems in Sweden’s economy, but aren’t very good at monetary policy.



25 Responses to “Will those &%$#@& ever learn?”

  1. Gravatar of dwb dwb
    4. May 2012 at 07:15

    probably not. Fed members are largely just economists with friends. they get a paycheck whether they are right or wrong. incentives are everything.

  2. Gravatar of Ryan Ryan
    4. May 2012 at 07:25

    Prof. Sumner, for the sake of my having some sort of mental context for comparison, what sort of conditions in Sweden would suggest the environment is ripe for an increase of rates?

  3. Gravatar of Benjamin Cole Benjamin Cole
    4. May 2012 at 07:42

    Excellent blogging.

    But will Sumnerian Reason triumph over Established Conventional Obtuseness?

    As David slew Goliath…..

  4. Gravatar of Steve Steve
    4. May 2012 at 07:52

    Several of the hawkish FOMC members have recently spoken of the need to “raise rates in order to signal confidence in the economic outlook.”

    I don’t know of any economic model that supports that. I think many regional Fed presidents are friends with community bankers, and the community bankers believe that, ceteris paribus (i.e., no economic crash), they will have more interest income with higher rates. Therefore, higher rates produce confidence and wealth.

    You are right that there’s no economic model there. It’s just community bankers who want more interest income pushing their friends to tighten monetary policy.

  5. Gravatar of StatsGuy StatsGuy
    4. May 2012 at 07:56

    Take heart… Oil broke below $100 in the US today… As soon as it gets to $85, we’ll see the Fed do something. Brent is below $112… the central bankers want to see it drop to $90ish.

  6. Gravatar of Benjamin Cole Benjamin Cole
    4. May 2012 at 08:05

    Excellent blogging. Excellent, excellent blogging. Excellent blogging that is excellent.

  7. Gravatar of Steve Steve
    4. May 2012 at 08:30


    I agree, but every time the Fed or ECB stomps on AD in order to deal with a temporary supply shock, they make the supply shock permanent. Far better to let the market resolve the supply shock.

    I’m currently worried that the Fed is trying to restrict job creation in order to prevent rent increases that would lead to expansion of the rental stock.

  8. Gravatar of Max Max
    4. May 2012 at 08:43

    Steve, one group that definitely wants a higher rate is money market funds. A lot of high cost funds are waiving fees to maintain a 0% yield, so a small rate increase (e.g. to 0.5%) would be extremely valuable. The customers would not see any yield increase; instead the funds would be much more profitable. Schwab has published not one but two editorials in the WSJ asking for higher rates (of course not telling the reader the real reason).

  9. Gravatar of John David Galt John David Galt
    4. May 2012 at 09:53

    Forgive me if this is a stupid question, but does the zero bound actually have to be the absolute limit everyone is assuming it is? What would happen if, say, the Fed were to offer to loan small businesses $50k-200k for 3-5 years at a rate of minus 2 or 3 percent, on condition that the business use the money to hire people or expand operations?

  10. Gravatar of Major_Freedom Major_Freedom
    4. May 2012 at 10:13

    John David Galt:

    What would happen if, say, the Fed were to offer to loan small businesses $50k-200k for 3-5 years at a rate of minus 2 or 3 percent, on condition that the business use the money to hire people or expand operations?

    You mean what would happen if the Fed started giving “small business” free money and paying them to take it besides, as long as they do what the Fed wants?

    What would probably happen is that those businesses who are juuuuuust too big to get this free money, will start firing workers and reducing their production, so as to get in on this free money action for those “small businesses” who qualify.

    What would also probably happen is that bad businesses who waste resources would be able to stay in operation, thus tying up precious scarce resources and wasting them, rather than changing their operations or going bankrupt, so that the resources can be use in non-wasteful deployments.

    What would also probably happen is that big business would lobby the Fed for the free money the Fed is doling out to small businesses.

    Finally, what would probably happen is that the money would never be paid back, because the loan has a negative interest rate, which means as long as the borrower doesn’t pay the loan back, they will keep getting free interest payments from the Fed.

    In other words, the economy would become a wasteland.

  11. Gravatar of cthorm cthorm
    4. May 2012 at 10:22

    Ben Bernanke is not a top monetary economist anymore, he is the Chariman of the FOMC. He speaks for the organization, and has to avoid contradicting the status quo. Just like the Drug Czar.

  12. Gravatar of Negation of Ideology Negation of Ideology
    4. May 2012 at 10:35

    John David Galt –

    The Fed wouldn’t likely do it that way. It would more likely simply buy Treasuries for more than face value. The Treasury is currently considering allowing bids with negative rates. For example, if you buy a 3 month $100 T-Bill for $101 dollars, that would effectively be a -4% yield.


    Of course, interest rates are the wrong target anyway – as Scott has pointed out. I’m just noting that the Fed could create a negative yield on Treasuries.

  13. Gravatar of Benjamin Cole Benjamin Cole
    4. May 2012 at 11:52

    An imposter is loose! I would have been more effusive in my praise!

  14. Gravatar of StatsGuy StatsGuy
    4. May 2012 at 12:35


    Oh, I don’t think it’s a good idea what the Fed is doing. But since 2009, I’ve decided to try to separate what I think is a good idea from what the Fed is likely to really do. It has proven less financially toxic to my personal asset base.

  15. Gravatar of StatsGuy StatsGuy
    4. May 2012 at 12:36

    “I’m just noting that the Fed could create a negative yield on Treasuries.”

    Negative IOR is better.

  16. Gravatar of Major_Freedom Major_Freedom
    4. May 2012 at 13:08

    Propagation of Ideology:

    Of course, interest rates are the wrong target anyway – as Scott has pointed out.

    So is aggregate spending. So are all other mere components of praxeology as it pertains to money.

    Money is not just something that is spent. If the only thing that money did was be spent, then it would not even be a money at all, since there would be value derived from holding it, and a value of holding it is necessary for a money to be a money.

    It is just as flawed to target money supply only, i.e. holding of money, as it is to target money spending only, i.e. exchanges of money.

    Since NGDP targets the spending of money, it can only create unintended and destructive consequences on the side of holding money. Attacking the holding of money, if the attacks are going to be successful, will inevitably destroy the holding of money.

    The only effective target when it comes to money is targeting the spending and the holding of money, for both are valued, not just one or the other. And how will the Fed target both the spending and the holding of money? Easy. They just stop printing money and close up shop, and the people will target exactly how much spending and holding should exist, by the individual owners of the money choosing how much to target in spending, and how much to target in holding.

    The collective outcome of individuals targeting money spending and money holding, is the optimal target, since wouldn’t you know it, it matches up the people’s preferences and values exactly.

    Of course, for philosophic Platonists, for those who see conflict everywhere, who can only believe that the collective outcome of individual market behavior must contain an additional external non-market entity that plugs gaps or digs holes depending on what others do, are just committing the reification fallacy, of pretending that the aggregate outcome has a life of its own, where if it suffers, then the member human cells suffer, and if it is benefited, then the member human cells are benefited.

    Even if everyone acts in their own interests, and, say, everyone seeks to increase their purchasing power by way of lowering their bidding prices for the goods they buy, so that everyone just pays lower prices whilst having the same cash balances, this allegedly leads to the collective blob entity feeling pain, and that pain allegedly makes the individual human cells feeling pain.

    Why does anyone believe this is nothing more that a modern version of the same myths of the ancients?

    Individuals felt unnecessary, additional pain during the Great Depression because some misguided people got wage prices to remain higher than they would have otherwise been without those misguided actions. The collapse in money supply was brought about by a destructive increase in credit expansion, that is based on debt. When debt is defaulted on, when banks go bankrupt, what used to be money, is erased from existence.

    The fact that the market process led to a falling money supply, shows that a falling money supply was the cure. There was too much fake money in circulation in the form of credit expansion and fractional reserve.

    Instead of dogmatically adhering to central planning notions of “total spending and total money supply must be controlled by God-man”, one should instead ask why in the world did the money supply fall so much in the early 1930s? Were people burning money? Did they destroy money in some ritual? No, money was destroyed organically due to the fact that fractional reserve money is destructive in the division of labor.

    Destruction of money doesn’t happen with 100% reserve banking. Well excluding alien invasions and nuclear wars. No, with 100% reserve banking, once money is created, it stays created no matter who defaults on debt.

    Market monetarists, and their sacrificial idol Milton Friedman, falsely believe that the decrease in money supply in the early 1930s was caused by the Fed NOT inflating enough, when in reality it is because there was too much fractional reserve fiduciary media circulating in the economy masquerading as money.

    The market process of learning and discovery and action in exchanging private property naturally purges society of harmful objects. It is so incredibly arrogant and misguided to believe that the problem was that a non-market institution that is based on violence, didn’t do more in a sphere of action that only continuing violence can allow for. It’s lunacy. It’s sociopathic.

    The fact that peace brought about the decline in the money supply in the early 1930s, means that there was too much of whatever was being used as money, in existence. Yes, there is such a thing as too much money, and not because it’s more than what any one individual arbitrarily deems as too much on the basis of some silly astrology model, but on the basis of being more than what the actions of individual private property owners would allow for.

    The money supply would never have fallen in the 1930s if there was 100% reserve banking. With 100% reserve banking, the entire population of banks could have gone bankrupt, and the money supply still would not have fallen.

    You want to know where Milton Friedman was actually right? It was when he supported a monetary reform bill that would have enforced protection of private property rights and abolished fractional reserve banking. He supported a bill that would have required banks to respect the property rights of their clients by holding 100% reserve against their client’s demand deposit accounts. Demand deposits are not loans. They are not, economically speaking, ownership title transfers from clients to banks. There can be only one unconditional and absolute owner of a property, and fractional reserve destroys that by enforcing conditional money with conditional claims only. Instead of demand deposit owners having unconditional and absolute ownership rights to money, they instead have a claim that is conditional on the habits of other demand depositors and what they do. Fractional reserve banking turns banks into casinos that issue lottery tickets.

    The money supply fell in the early 1930s because the market process resulted in a purge of destructive credit expansion. Misguided central planning wannabes fallaciously interpret this as a failure of not enough central planning. All central planners think alike in this respect.

    The more the total money supply is composed of credit expansion, or in other words fiduciary media, the more the money supply has the potential to fall. Today, far more money is composed of credit than existed in the early 1930s. If the Fed stopped printing money tomorrow, and the free market process determined the correct money supply, then do you know what will probably happen? Probably half or more of the money supply would be erased, and all the garbage that was built on credit, including most of the government, would be eliminated, and the left over resources and labor power redirected to what is sustainable in the long run, i.e. to forever.

    Only a few people are able to grasp the profound antagonisms that are introduced into the world because only a few people in the world grasp how a market economy really works.

    You see falling NGDP and you believe it’s a problem of lack of money spending, rather than too much prior spending, that is now being corrected through peaceful exchanges.

    You see falling money supply and you believe it’s a problem of lack of money creation, rather than too much prior money creation, that is now being corrected through peaceful exchanges.

    You see falling employment and you believe it’s a problem of lack of demand, rather than prior demand for unsustainable projects being too high, that is now being corrected through peaceful exchanges.

    Those who see correlations between falling NGDP and depressions, and infer that the falling NGDP caused the depression, are like misguided dimwits who see the correlation between falling drinking and hang-overs, and infer that the falling drinking caused the hangover. Just like most things Keynesians, there is a kernel of truth to this. Yes, if the person drank more, he’d avoid a hang-over. But the drinking itself is what made the hang-over necessary at all.

    Monetarists want to keep drinking, and the stingy, no fun Austrians are saying the problem isn’t the lack of drinking that is the cause, it’s the prior drinking that is the cause, and the hang-over is a part of the progressing to health.

    The fact that soon after the Fed stops printing money, the money supply collapses, and NGDP collapses, rather than stabilizing and neither falling nor rising, means that the free market doesn’t want all that money and spending to begin with. It’s too much. There is as economists say a partial relative overproduction of dollars and a partial relative underproduction of other goods which cannot be produced because the resources are tied up in fiat money production and everything it entails.

    Just consider how many resources are being wasted in maintaining fiat money production. We have huge quantities of resources tied up in fiat money that would not exist, or at least would be reduced, in free market gold money: foreign exchange, currency speculation, commodity speculation, domestic police in enforcing fiat money over competing currencies, the machines that produce the linen and cotton that go into US money, the machines that print US dollars, the computers that run and store fiat money maintenance, the list goes on and on.

    Then there are the more nuanced understandings of how fiat money redirects and uses up resources: The large quantity of resources that go into the US military to invade countries that threaten to sell oil in something other than dollars, the wasted capital that is a result of inflation, and the lost opportunities that forever prevent what could have been a higher productivity going forward.

    Fiatbugs typically believe that a gold standard would “waste” resources, because it would see resources that would not have been needed with fiat to be used in gold production. Use up, yes. Waste, no. For the resources that have been and continue to be used up in maintaining and enforcing fiat money FAR outweigh the resources that would be used in gold money production. This because in a gold money standard, gold production has to be profitable. There cannot be investment in extracting gold unless the gold is readily available with existing technology and machines. More gold production can’t be profitable unless market participants release resources that could have gone into other goods, into more gold production instead. No more and no less resources than market participants are willing to put into gold production, will go into gold production. If people want more cars, or houses, or medicine, then profits will be producing more of these things, rather more gold. If people want more gold, then gold production will become profitable.

    This CANNOT be mimicked in fiat money systems. One cannot observe spending declining and then inferring that this means people want X money from the Fed, so the Fed should print money so as to prevent spending from falling. Nobody has this knowledge of how much spending there should be. Market monetarists are deluding themselves. No individual in the market plans total spending, because it’s not important to them. That individual market participants don’t care about total spending, is not an open invitation by them for you or anyone else to care for it “on their behalf.” No one individual cares about annual total distances travelled by people. Does that mean they are sending an open invitation to you or any other central planning wannabes to tie up resources based on force, to ensure that total distance travelled doesn’t fall when they decrease the distance they travel? After all, if everyone stopped moving, people would die! That means governments can’t let aggregate moving fall, but only in “optimal moving areas” of course. Other places who cares.

    If you say that total movements should fall if individuals want to decrease their movements, then would it make any sense to you for me to say exactly what you market monetarists say, that individuals decreasing their movements is not the same thing as individuals wanting aggregate movements to fall, and even though an individual might find utility in decreasing their movements, it doesn’t mean it is good for the individual if everyone did that, and so that government should prevent aggregate movements from falling after all?

    Just like this is silly, so is fretting over total spending silly. No market participant cares about total spending for the exact same reason they don’t care about nominal gross domestic movements. Yes, even if a fall in aggregate movements accompanies a hypothetical fall in the hypothetical living standards of the hypothetical individual who wants more movement related utility, but that doesn’t mean there should be total movement targeting by governments.

    If individuals value holding more cash, then let them. Even if this has unintended consequences, let it happen. Even if people wanting to hold more cash leads to the unemployment of others, let them. One individual holding more cash will never lead to their own unemployment, so if you say we shouldn’t worry whether or not my reduction in spending money on good X has the unintended consequence of unemployment in the company that produces X, then I will say to you that you shouldn’t worry whether or not everyone’s reduction in spending money on goods has the unintended consequence of everyone’s unemployment.

    Why is the unemployment of workers in one company irrelevant, but the unemployment of an arbitrary number of workers in an arbitrary number of companies relevant?

    Why should there be money printing when just one company goes bankrupt and there is a decline in spending “local” spending, and thus a decline in “aggregate” spending? And not only that, but why should government IOU wners get more money when this one company goes bankrupt? What did the IOU owners do to deserve a higher price for them? The IOU market makers knows the Fed is printing money and bringing about a demand for them that would have been lower absent the Fed, and thus bringing about higher prices, which you misguidedly call “market prices.”

    What possible rationalization is there for newly created money from the Fed to go to its preferred friends in Wall Street and the Treasury, when there is a local decline in spending in Des Moines via cash holding, and thus a decline in aggregate spending? Your ridiculous worldview is calling for poor cash savers to fall behind even more in relative terms compared to the wealthy who gobble up the majority of newly created money.

    Poor people invest very little. They can only “invest” in cash. Your worldview is calling for poor people to become even poorer via insidious wealth transfer that accompanies inflation. The poor save cash, and they are punished by the absolutism that is the God NGDP.

    The tragic thing is that you actually believe you’re helping them.

  17. Gravatar of ssumner ssumner
    4. May 2012 at 14:14

    dwb, I keep holding on to the fact that the Fed generally does what the consensus of economists wants them to do—now if we could only change that consensus.

    Ryan, Both inflation and employment are expected to remain below target.

    Steve, Yes, and the Titanic should have “destroyed lifeboats to boost confidence in the captain’s skill.”

    statsguy, Yes, but then we remain on the treadmill.

    Ben, You said;

    “Excellent blogging. Excellent, excellent blogging. Excellent blogging that is excellent.”

    Excellent comment!

    Max, Yes, but what they don’t know is that easier money is the only way to get higher rates to stick.

    John, That would not help, as free market rates would stay above 0%.

    cthorn, Yes, unfortunately.

    Ben, Ah, that seemed a bit effusive even for you.

  18. Gravatar of Max Max
    4. May 2012 at 14:29

    “Yes, but what they don’t know is that easier money is the only way to get higher rates to stick.”

    Higher rates are sticking just fine in the UK. They don’t care whether the rate is 0.5% or 5%, they only care that it isn’t 0%.

  19. Gravatar of dwb dwb
    4. May 2012 at 18:23

    I keep holding on to the fact that the Fed generally does what the consensus of economists wants them to do””now if we could only change that consensus.

    well, on optimistic side it does seem to be getting a lot of attention so people are taking it seriously.

  20. Gravatar of Morgan Warstler Morgan Warstler
    4. May 2012 at 20:14

    “Ben Bernanke is not a top monetary economist anymore, he is the Chariman of the FOMC. He speaks for the organization, and has to avoid contradicting the status quo. Just like the Drug Czar.”

    Finally intelligence.


    And Stats steps up and gets closer to a bet on my Ben gets one bite at apple scenario.

    Which makes Stats a little skitzo, because he was just saying Ben was in bag of GOP.

    If you are Ben, you only get ONE chance for QE, if you judge the most important top-line condition for moving 3% of voters – well gas prices might be the thing. Are enough employed voters who like Obama, willing to stick with him if gas prices are down under $3?

    And if you wanted gas prices down in November, when would you have to give the country its medicine (yes, I know Scott, healthy = high gas prices).



    1. Scott says Obama will win.
    2. Scott says Ben can do whatever he wants.
    3. Scott says Ben isn’t doing what he REALLY wants.

    Notice how far from politics Scott assumes Ben is… and puts Ben smack dab in the middle of politics.

    Ben can do what he wants – which would help Obama.
    But Ben isn’t doing what he really wants – which would help Obama.

    Why would Ben not help Obama????

    One wonders.

  21. Gravatar of Rien Huizer Rien Huizer
    4. May 2012 at 22:01


    Very good to exhibit this example of Swedish deliberations. Two observations though:
    1) little is said about the exchange rate (but exchange rates seem to be implied in models used and policy). Clearly in Sweden;s case the most important exchange rare is the SKR/EUR and any targeting in a very open economy integrated with the EUR area cannot regard that exchange rate as a random walk. There may be (trade-) political reasons for this: Sweden is bound by treaty to join the EUR but has not done so so far; in contrast to Denmark that is not bound to join but has committed to shadow and Finland which is an activist EUR member. Probably the less explicit gvt/CB delinerations are about the exchange rate, the more that would raise poliycal problems (also given the populist scare mongering that goes on in this otherwise rationalist country)
    2) the arguments relating to financial stability. Of course Svenson is right when he says that macroprudential issues (eg consumer indebtedness -a traumatic topic in Sweden) better be dealt with through specific regulation than monetary policy. However, that is not the view of the financial services lobby and several members probably feel that excessively tight monetary policy (problematic under a dual mandate) with higher consumer rates would have a similar effect, without an increase in regulations.

    An interesting demonstration of good economics arguments losing the fight against interest group politics in a seemingly rational debate where the main policy target (the “target” exchange rate) is not even subject of the discussion.

  22. Gravatar of Ryan Ryan
    5. May 2012 at 03:49

    Prof. Sumner, okay, but how would one go about measuring those kinds of expectations for the sake of actually engaging in a rate-cutting policy?

  23. Gravatar of ssumner ssumner
    6. May 2012 at 08:06

    Max, When did the BOE raise rates?

    dwb, I agree.

    Morgan, I doubt Bernanke cares who wins.

    Rien, You may be right about exchange rates, but it speaks well of the Riksbank that they seem to ignore them. Keep one’s eye on the ball, which is NGDP (or inflation and jobs)

    If they think tight money will prevent bubbles they are sadly mistaken. Tight money leads to low interest rates–which bubble-maniacs think causes bubbles.

    Ryan, Set up a NGDP futures market. It’s criminal negligence that we haven’t done that already.

  24. Gravatar of Max Max
    6. May 2012 at 09:32

    The BOE never lowered rates (to zero), same thing. Point is, a central bank can just as easily maintain a 0.5% lower bound as a 0% lower bound.

  25. Gravatar of ssumner ssumner
    7. May 2012 at 07:08

    Max, So what’s the point of your argument?

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