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A Role Model for the Conduct of Fiscal Policy? Experiences from Sweden

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  • Flodén, Martin

Abstract

Sweden was hit by a severe macroeconomic crisis in the early 1990s. GDP fell for three consecutive years in 1991-1993, unemployment increased by 9 percentage points, banks had to be nationalized, and public budget deficits exceeded 10 percent of GDP. The recovery was however quick. GDP growth was around four percent in 1994-1995, and budget deficits had been eliminated by 1998. Growth remained high in the subsequent decade, and the government debt ratio was reduced by almost 50 percent of GDP. This paper describes and analyzes the Swedish crisis and the policy measures implemented in response to the crisis. Policy measures include abandoning the fixed exchange rate, fiscal austerity, a new stricter fiscal framework, and several structural reforms in the 1990s. These policies were appropriate for handling the Swedish crisis, but the Swedish experiences have limited applicability for the current debt crisis, in particular because currency depreciation in combination with strong growth on export markets was a key ingredient in the Swedish recovery. Implementing fiscal austerity would have been more complicated absent this export-led growth. Moreover, the new fiscal framework has most likely contributed to strengthening public finances, but I demonstrate that budget surpluses and high GDP growth only explain around a third of the reduction in the public debt ratio after 1997.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9095.

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Date of creation: Aug 2012
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Handle: RePEc:cpr:ceprdp:9095

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Keywords: Banking crisis; Fiscal consolidation; Fiscal rules; Macroeconomic crisis;

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  1. Englund, Peter, 1999. "The Swedish Banking Crisis: Roots and Consequences," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 80-97, Autumn.
  2. Persson, Torsten & Tabellini, Guido, 1999. "Political economics and macroeconomic policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 22, pages 1397-1482 Elsevier.
  3. Simon Wren-Lewis & Lars Calmfors, 2011. "What should fiscal councils do?," Economics Series Working Papers 537, University of Oxford, Department of Economics.
  4. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions be Expansionary? Tales of Two Small European Countries," NBER Working Papers 3372, National Bureau of Economic Research, Inc.
  5. Andrea Pescatori & Daniel Leigh & Jaime Guajardo & Pete Devries, 2011. "A New Action-Based Dataset of Fiscal Consolidation," IMF Working Papers 11/128, International Monetary Fund.
  6. Gösta Ljungman, 2009. "Top-Down Budgeting," IMF Working Papers 09/243, International Monetary Fund.
  7. Assar Lindbeck, 1997. "The Swedish Experiment," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1273-1319, September.
  8. Gösta Ljungman, 2008. "Expenditure Ceilings: A Survey," IMF Working Papers 08/282, International Monetary Fund.
  9. Stéphanie Guichard & Mike Kennedy & Eckhard Wurzel & Christophe André, 2007. "What Promotes Fiscal Consolidation: OECD Country Experiences," OECD Economics Department Working Papers 553, OECD Publishing.
  10. Stefania Fabrizio & Ashoka Mody, 2006. "Can budget institutions counteract political indiscipline?," Economic Policy, CEPR & CES & MSH, vol. 21(48), pages 689-739, October.
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  12. Lars Calmfors, 2012. "Sweden - from Macroeconomic Failure to Macroeconomic Success," CESifo Working Paper Series 3790, CESifo Group Munich.
  13. Guiseppe Pisauro, 2001. "Intergovernmental Relations and Fiscal Discipline," IMF Working Papers 01/65, International Monetary Fund.
  14. Lars Calmfors, 2012. "The Swedish Fiscal Policy Council: Watchdog with a Broad Remit," CESifo Working Paper Series 3725, CESifo Group Munich.
  15. Lars E.O. Svensson, 2012. "Practical Monetary Policy: Examples from Sweden and the United States," NBER Working Papers 17823, National Bureau of Economic Research, Inc.
  16. Adam S. Posen, 1995. "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 253-274 National Bureau of Economic Research, Inc.
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