Svensson: Differing views on monetary policy
Monetary policy shall stabilise inflation around the target of 2 per cent and unemployment around a long-run sustainable level. This is emphasised by Deputy Governor Lars E.O. Svensson in his speech at SNS/SIFR Finanspanel. A lower repo rate in recent years would have led to better target fulfilment for both inflation and unemployment. At the same time, financial stability and mortgage growth in the present circumstances are no reasons to hold inflation below the target and unemployment above a sustainable level. Moreover, the average unemployment rate has probably been higher over the past 15 years as a result of inflation undershooting the target during the same period. It is therefore important in future to keep average inflation on target over a longer period of time.
Mr Svensson says that according to the Sveriges Riksbank Act and its preparatory works, the mandate for monetary policy is price stability and to attain the highest possible sustainable employment, which in turn can best be achieved by stabilising inflation around the target and unemployment around a long-run sustainable level. A well-balanced monetary policy then entails choosing at each monetary policy meeting the repo-rate path that according to the corresponding forecasts for inflation and unemployment best stabilises inflation and unemployment. Target fulfilment for both inflation and unemployment would have been better if the Riksbank had conducted a more expansionary monetary policy in recent years.
Mr Svensson further discusses in his speech some of the objections that have been raised against his view in the monetary policy debate. In reality, these objections mean that monetary policy has more objectives than stabilising inflation and unemployment, which risks making monetary policy arbitrary and disjointed. The objective of price stability and the highest sustainable rate of employment should not be prejudiced out of consideration for financial stability, except in extreme circumstances and then only for a limited time. At present, however, there are no signs of such extreme circumstances in Sweden – financial stability can be maintained with macroprudential supervision and thus does not entail any justification for conducting a tighter monetary policy.
Mr Svensson also shows that the average inflation rate in Sweden during the past 15 years has significantly undershot the inflation target, despite other countries that have had an inflation target as long as Sweden managing to attain their targets. As inflation expectations have at the same time been anchored to the target, the long-term relationship between average inflation and average unemployment has become negative. The fact that inflation has undershot the target appears to have led to a significant real economic cost in the form of higher average unemployment. In Mr Svensson's view, it is therefore important that monetary policy should henceforth be conducted so that average inflation is held in line with the target over a longer period of time.