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Practical Monetary Policy: Examples from Sweden and the United States

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  • Lars E. O. Svensson

Abstract

In the summer of 2010, the Federal Reserve’s and the Swedish Riksbank’s inflation forecasts were below the former’s mandate-consistent rate and the latter’s target, respectively, and their unemployment forecasts were above sustainable rates. Given the mandates of the Federal Reserve and the Riksbank, conditions in both countries clearly called for policy easing. The Federal Reserve maintained a minimum policy rate, soon started to communicate possible future easing, and in the fall launched QE2. In contrast, the Riksbank started a period of rapid tightening. I examine the arguments that were raised in opposition to the Federal Reserve's easing, and those for the Riksbank's tightening. Although the Swedish economy subsequently performed better than expected, probably an important reason was that the market implemented much easier financial conditions than were consistent with the Riksbank’s policy rate path. Without the policy tightening, performance would have been even better. The U.S. economy meanwhile performed worse than expected because of factors other than monetary policy. Without the policy easing, performance would have been even worse. Thus, the Federal Reserve appears to have followed its mandate in the summer of 2010, and subsequent adverse economic shocks contributed to weak performance of the U.S. economy. In contrast, the Riksbank appears to have deviated from its mandate, but favorable circumstances contributed to an economic outcome with better performance than might have been expected based on policy choices.

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Bibliographic Info

Article provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.

Volume (Year): 42 (2011)
Issue (Month): 1 (Spring) ()
Pages: 289-352

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Handle: RePEc:bin:bpeajo:v:42:y:2011:i:2011-01:p:289-352

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Keywords: monetary policy; Sweden; Swedish Risksbank; Federal Reserve; inflation;

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References

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  1. Eric T. Swanson, 2011. "Let's Twist Again: A High-Frequency Event-Study Analysis of Operation Twist and Its Implications for QE2," 2011 Meeting Papers 982, Society for Economic Dynamics.
  2. Hess Chung & Jean‐Philippe Laforte & David Reifschneider & John C. Williams, 2012. "Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 47-82, 02.
  3. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "Large-scale asset purchases by the Federal Reserve: did they work?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 41-59.
  4. James D. Hamilton & Jing Cynthia Wu, 2011. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," NBER Working Papers 16956, National Bureau of Economic Research, Inc.
  5. Carl Andreas Claussen & Øistein Røisland, 2010. "The discursive dilemma in monetary policy," Working Paper 2010/05, Norges Bank.
  6. Baumeister, Christiane & Benati, Luca, 2010. "Unconventional monetary policy and the great recession - Estimating the impact of a compression in the yield spread at the zero lower bound," Working Paper Series 1258, European Central Bank.
  7. Katrin Assenmacher-Wesche & Stefan Gerlach, 2010. "Monetary policy and financial imbalances: facts and fiction," Economic Policy, CEPR & CES & MSH, vol. 25, pages 437-482, 07.
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Cited by:
  1. Richhild Moessner & Jakob de Haan & David-Jan Jansen, 2014. "The effect of the zero lower bound, forward guidance and unconventional monetary policy on interest rate sensitivity to economic news in Sweden," DNB Working Papers 413, Netherlands Central Bank, Research Department.
  2. Flodén, Martin, 2013. "A role model for the conduct of fiscal policy? Experiences from Sweden," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 177-197.

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