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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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Suggested Citation

  • Lars E. O. Svensson, 2011. "Practical Monetary Policy: Examples from Sweden and the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 289-352.
  • Handle: RePEc:bin:bpeajo:v:42:y:2011:i:2011-01:p:289-352
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    References listed on IDEAS

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    1. Carl Andreas Claussen & Øistein Røisland, 2014. "The Discursive Dilemma in Monetary Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(3), pages 702-733, July.
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    More about this item

    Keywords

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

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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