Jansson: The ideological debate on monetary policy – lessons from developments in Sweden

Lessons from Swedish monetary policy

"Developments in the Swedish economy in recent years and the monetary policy we have conducted have provided us with useful experiences that are well worth sharing." These are the words of Per Jansson in Wednesday's speech at Fores, where he commented on the recent international debate on monetary policy. A number of economists and observers have claimed that factors such as globalisation and digitalisation are making it very difficult, and at worst impossible, for central banks to reach their inflation targets. They also say that monetary policy should be aimed to a higher degree at counteracting financial imbalances.

In relation to this debate, Sweden finds itself in a rather unique position, says Mr Jansson. "We have discussed the issues in focus for longer than most other countries, we have experience of a policy that was aimed, to a certain extent, at counteracting financial imbalances, inflation fell earlier in Sweden than in many other areas, but we have also managed to bring it back on target."

A persistent, expansionary monetary policy brings up inflation

Mr Jansson highlighted three lessons from developments in Sweden: that it is important not to lose sight of inflation and inflation expectations; that it probably requires significant rate rises to counteract a financial imbalance; and that it may take a long period of highly expansionary policy to bring inflation up – but that it is possible to bring it up.

"It has turned out to be surprisingly difficult to bring inflation back on target once it has fallen, particularly if inflation expectations have fallen too," Mr Jansson said. In Sweden's case, CPIF inflation was systematically below target for about six years. To halt and then reverse the fall, the Riksbank has been conducting a very expansionary policy for a long time. This persistence has been proven to be successful, however, as inflation is now in line with the target.

Substantial interest rate rises are required to subdue financial imbalances

One issue where Mr Jansson said he had revised his opinion is how much higher the interest rate must be kept to counteract a financial imbalance. "Previously, I was reasonably confident that a central bank could counteract financial imbalances by holding the policy rate just slightly higher than otherwise. Today, I am more sceptical about this", he reasoned. "To permanently curb the build-up of debt, we would probably have needed to hold the interest rate significantly higher than we did, and, apart from the Swedish economy having then developed much more weakly, inflation would have been even lower than it was."

As I see it, financial imbalances are often the result of the regulations governing the financial system not being stringent enough or even, perhaps, of fundamental shortcomings in the entire 'business model' of the financial sector. The failure of important markets to function sufficiently well may also be of great significance. I find it extraordinary in this context to demand that a higher interest rate should solve the problems", Mr Jansson continued.

Mr Jansson concluded by noting that monetary policy frameworks naturally do not last for ever but that there is, so far, still reason to maintain our current inflation-targeting policy.