Are we talking about the same thing? – the gap between research and public debate
“If we are criticised for how we succeed in our task of keeping inflation low and stable, all is well and good – then the criticism and the monetary policy framework are playing on the same playing field. But when the critics argue that we should focus on avoiding negative policy rates, keeping the krona stable or strengthening it, or stabilising economic activity in the short term, it is difficult to relate to the criticism. Then it is actually the monetary policy framework that is being criticised, not monetary policy, and for the discussion to be meaningful, it is important to clarify this. Of course, one can also have views on the framework, but high demands are placed on those who argue that it should change.” These comments were made by Deputy Governor Per Jansson, speaking today at Danske Bank.
Date: 12/12/2023 08:30
Speaker: Deputy Governor Per Jansson
Place: Danske Bank
Price stability in focus in the new Sveriges Riksbank Act
There is often a major difference between how one views monetary policy in some parts of the general debate and how it is viewed in research and by policymakers. This may concern very central aspects, such as the preconditions for monetary policy, why the Riksbank has the task it has, and sometimes even what that task is.
But both the previous and the new Sveriges Riksbank Acts focus on price stability. “The reason is that political decision-makers and economists around the world are convinced that an economy works better with a credible inflation target as a benchmark for price setting and wage formation,” Mr Jansson pointed out. When objections to monetary policy ignore the Riksbank’s main task, it becomes difficult to conduct a constructive discussion. It is therefore good that the new act is even clearer than the previous one in its wording.
Evaluation of monetary policy with praise and criticism
The new Sveriges Riksbank Act stipulates that monetary policy should be regularly evaluated. In the most recent evaluation of policy in 2022, three external academic experts reviewed not only monetary policy but also the criticisms of the Riksbank. They considered that the negative policy rate, which has often been criticised, was on the contrary an appropriate policy under the conditions that prevailed. Cutting interest rates to zero was simply not enough to stimulate the economy, as normal real interest rates have fallen significantly in the world over the past three decades.
They, however, judged that the Riksbank should have raised the policy rate earlier and by more in 2022. The Riksbank underestimated inflation in its forecasts and should have realised that inflation would also rise in Sweden.
”They may have a point here. The strong recovery after the pandemic, the expansionary monetary policy and the rapid global cost increases caused companies to raise their prices more and faster than before and consumers seemed to accept this. Perhaps we should have realised sooner that such a change was underway, or at least that it might be,” said Mr Jansson.
Constructive debate must take place on the same playing field
Of course, it is not the case that all of the discussion in the general debate ignores the Riksbank’s main task and the monetary policy framework. One example is the discussion about how much the policy rate needs to be raised for inflation to return to the target, within a reasonable period of time and without unnecessarily large negative effects on the economy. This is something that is very difficult to assess and about which one can have different opinions.
“On the other hand, there is often a major difference between how one views monetary policy in research and the practical implementation of policy and how it is viewed in large parts of the public debate, and this is problematic. A necessary condition for a meaningful discussion of how monetary policy is conducted is that we are all discussing the same things,” concluded Per Jansson.