Can monetary policy still deliver? A natural experiment

Transcription

1 A natural experiment Lars E.O. Svensson Stockholm School of Economics, CEPR, and NBER Web: larseosvensson.se The th Oxford-Federal Reserve Bank of New York Conference Oxford, September 7-8, 8

2 Can monetary policy still deliver inflation on target and full employment? A natural experiment Riksbank policy-rate hikes -, from.% to % What happens to inflation and unemployment when the central bank (for no good reason) raise the policy rate by 7 bp? What about the neo-fisherian view? Does inflation really increase?

3 7 bp for no good reason? Fed and Riksbank forecasts in June Inflation Unemployment Riksbank and Fed forecasts quite similar Policies very different Fed: Keep policy rate between and.%; use forward guidance; prepare and initiate QE Riksbank: Raise policy rate from.% to % Both cannot be right (Karolina Ekholm and I dissented against the hikes) Source: Svensson, Lars E.O. (), Practical Monetary Policy: Examples from Sweden and the United, Brookings Papers on Economic Activity, Fall, 89-.

4 The Swedish experience: Rate hikes - Interest rates Rate hikes 7 bp Inflation rates HICP Core PCE HICP HICP Inflation fell from % to zero 8 8 Real interest rates The real interest rate rose, created large gap Exchange rate Nominal Real The krona appreciated 8 8 The Future of Monetary Policy and Macroprudential Policy, paper prepared for the The Future of Central Banking: An ECB Colloquium Held in Honour of Vitor Constancio, Frankfurt, May -7, 8.

5 The Swedish experience: Rate hikes - Interest rates Rate hikes 7 bp Inflation rates HICP Core PCE HICP HICP Inflation fell from % to zero 8 8 Real interest rates The real interest rate rose, created large gap 8 Unemployment rates DE Unemployment stopped coming down, rose The Future of Monetary Policy and Macroprudential Policy, paper prepared for the The Future of Central Banking: An ECB Colloquium Held in Honour of Vitor Constancio, Frankfurt, May -7, 8.

6 The Swedish experience: Turnaround (after I had left) Interest rates Rate hikes 7 bp Rate cuts to -.% Inflation rates HICP Core PCE HICP HICP Inflation rose back to % Inflation fell from % to zero 8 8 Real interest rates The real interest rate rose, created large gap Exchange rate Nominal Real The krona depreciated The real interest rate fell The krona appreciated 8 8 The Future of Monetary Policy and Macroprudential Policy, paper prepared for the The Future of Central Banking: An ECB Colloquium Held in Honour of Vitor Constancio, Frankfurt, May -7, 8.

7 The Swedish experience: Turnaround Interest rates Rate hikes 7 bp Rate cuts to -.% Inflation rates HICP Core PCE HICP HICP Inflation rose back to % Inflation fell from % to zero 8 8 Real interest rates The real interest rate rose, created large gap 8 Unemployment rates DE Unemployment stopped coming down, rose - - The real interest rate fell Unemployment started coming down The Future of Monetary Policy and Macroprudential Policy, paper prepared for the The Future of Central Banking: An ECB Colloquium Held in Honour of Vitor Constancio, Frankfurt, May -7,

8 A natural experiment Monetary policy works like clockwork in Sweden Neo-Fisherian view rejected What contributes to powerful monetary policy in Sweden?. Strong exchange-rate channel. Strong household cash-flow channel 8

9 A natural experiment Small very open economy Strong exchange-rate channel o o Affects export and import-competing industry Affects prices of imported final goods and intermediate inputs 9

10 A natural experiment Percent 8 7 Household interest-paymentsto-disposable income ratio Interest payments/disposable income 99 High household debt, variable mortgage rates Strong household cash-flow channel Lower policy rate and mortgage rates reduce interest payments and improve indebted households cash-flows Insurance against recessions (with flexible exchange rates, not with fixed exchange rate)

11 A natural experiment Reconsider risks with variable mortgage rates: Depend on monetary-policy/exchange-rate regime Variable mortgage rates uncorrelated with income: Increased risk compared with fixed mortgage rates Previously: High mortgage rates negatively correlated with income (with fixed exchange rates, high interest rates in recessions: 99s crisis): Increased risk compared with fixed mortgage rates Now: Variable mortgage rates positively correlated with income (with flexible exchange rates and flexible inflation targeting, low interest rates in recessions: 8-9 crisis): Reduced risk compared with fixed mortgage rates