Why Paul Krugman Lost His Temper with the Swedish Riksbank?
14 Pages Posted: 30 Apr 2014
Date Written: April 28, 2014
Abstract
Paul Krugman recently attacked the Swedish Riksbank for its monetary policy that it has caused a deflationary process because it raised its key interest rate in 2010 and 2011 and by this triggered unnecessarily a deflationary process afterwards. He used the term sadomonetarist for this kind of policy. This response on his accusation of the author of this paper is that Krugman has overdone his challenge of the monetary policy of the Riksbank. He has not looked sufficiently at the empirical facts of the past development in Sweden. In particular at the real GDP growth and the inflation performance it was from the standard approach reasonable to increase interest rates in Sweden after a very strong rebound of Swedish growth in 2010 with 6,6% and further strong economic growth afterwards. Inflation predictions have never been a simple problem due to the multitude of channels through which monetary policy influences economic development. Therefore it is always easy afterwards to claim that policy makers should have done better. However, this is only true ex post by ignoring the uncertainty about the future. Furthermore Sweden has experienced a significant deceleration of its inflation rate, i.e. disinflation, but not deflation for a couple of years. This might, however, be caused by external factors like a global slowdown in economic growth and a recession in the Euro area in particular. If unforeseen by the Swedish Riksbank probably due to overoptimistic forecasts of the EU-Commission, this is caused by a forecasting error, but it is not caused by a monetary policy error. A deflationary spiral is even now not in sight in Sweden. The risk of a global deflation has its origins elsewhere in the global economy.
Keywords: monetary policy, Sweden, deflation
JEL Classification: E31, E4, E5, N14, F630
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