The future of inflation targeting and the present at the Riksbank

Transcription

1 The future of inflation targeting and the present at the Riksbank Lars E.O. Svensson Sveriges Riksbank Bank of Canada Economic Conference, July -, 8

2 Flexible inflation targeting Stabilize both inflation around target and resource utilization Forecast targeting: Choose an instrument-rate path such that the forecast of inflation and resource utilization looks good Looks good: Inflation goes to target and resource utilization goes to normal at an appropriate pace Publish and motivate instrument-rate path and forecast of inflation and real economy Management of expectations par excellence

3 Publishing the repo-rate path Repo-rate path integral part of the monetary policy stance, necessary for inflation and output-gap forecast Policy discussion more about path than current repo rate Six-member committee can easily agree on path Forecast, not commitment Mean forecast with uncertainty intervals

4 Repo rate with uncertainty bands, July 8 Per cent 7 9% 7% % Repo rate Source: The Riksbank

5 Deciding on a repo-rate path: Median path? Individual repo-rate paths governors, percent Outcome New repo-rate path Percent Outcome Govenor Govenor Govenor Govenor Govenor Govenor

6 Deciding on a repo-rate path: Just vote among a few alternatives Repo rate Per cent CPIX Annual percentage change Outcome Main scenario Lower interest rate Higher interest rate Main scenario Lower interest rate Higher interest rate GDP growth Annual percentage change Outcome Main scenario Lower interest rate Higher interest rate Outcome Main scenario Output gap Percentage deviation from the HP trend Lower interest rate Higher interest rate

7 Management of interest-rate expectations Publish and motivate inflation, real-economy, and repo-rate forecast Compare repo-rate path and market forward rates before and after announcement 7

8 Repo-rate path and market forward rates February Repo rate.. New repo-rate path. Day before. Day after Note: Source:

9 Repo-rate path and market forward rates June Repo rate. Old repo-rate path. New repo-rate path. Day before.. Day after Note: Source:

10 Repo-rate path and market forward rates October Repo rate.. Old repo-rate path. New repo-rate path. Day before. Day after Note: Source:

11 Repo-rate path and market forward rates December Repo rate. Old repo-rate path. New repo-rate path. Day before. Day after Note: Source:

12 Repo-rate path and market forward rates February Repo rate.. Old repo-rate path. New repo-rate path. Day before. Day after Note: Source:

13 Repo-rate path and market forward rates April Repo rate. Old repo-rate path. New repo-rate path. Day before. Day after Note: Source:

14 Repo-rate path and market forward rates July 8,,,,,, Repo rate, Old repo-rate path, New repo-rate path, Day before, Day after,, 7 8 9,,,,,,,,,,,, Note: Source:

15 Decision process at the Riksbank -member Executive Board policy decisions per year ( reports, updates) Interaction between staff and EB results in main and alternative combinations of forecasts of repo rate, inflation, and real economy At final policy meeting EB discusses and votes on decision and report/update Majority decision published day after policy decision Attributed minutes, including any dissenting views, published weeks after policy decision

16 Individualistic committee Individual accountability Members appointed by Parliamentary committee Regular hearings in Parliament, expert evaluation every th year (Giavazzi-Mishkin ) Attributed minutes, dissenting views No free riding/social loafing; better preparation Less free discussion? Less group-think?

17 Individualistic committee: Cacophony problem? No: After decision, before minutes: Majority view After minutes: Individual members clarify their individual views and position at last decision No info about future decisions beyond published repo-rate path and Monetary Policy Report/Update Except some comments on new data relative to previous forecast and possible policy tradeoffs 7

18 To be done: The near future Better measures of resource utilization, output gap, potential output Potential output, not HP: Flexprice, conditional or unconditional, relation to Pareto-efficient output Optimal policy, minimize quadratic loss function, commitment: Main and alternative repo-rate paths Alternative repo-rate paths: Simulate as anticipated, not unanticipated (not Leeper-Zha modest interventions) DSGE models w/ better financial sector, labor market 8

19 To be done: The not so near future Price-level targeting L t * ( pt pt ) ( yt yt * * * p t p t Less long-run price-level uncertainty than inflation targeting If credible, inherent stabilization of inflation expectations: p t e t ) 9

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21 Decisions January 7-July 8 Outcome MPR 7: MPR 7: MPR 7: MPU 7: MPM 8: MPM 8: MPM 8: Repo rate Per cent Outcome MPR 7: MPR 7: MPR 7: MPM 8: MPU 7: MPM 8: MPM 8: CPI Annual percentage change Outcome MPR 7: MPR 7: MPR 7: MPM 8: MPU 7: MPM 8: MPM 8: Real repo rate From CPI, per cent... MPR 7: MPR 7: MPR 7: MPU 7: MPM 8: MPM 8: MPM 8: Output gap Percentage deviation from HP trend

22 Decisions January 7-July 8 Repo rate Per cent CPIX Annual percentage change Outcome MPR 7: MPR 7: MPR 7: MPU 7: MPM 8: MPM 8: MPM 8: Outcome MPR 7: MPR 7: MPR 7: MPU 7: MPM 8: MPM 8: MPM 8: ,,,,, Outcome MPR 7: MPR 7: MPR 7: MPU 7: MPM 8: MPM 8: MPM 8: Real repo rate From CPIX, per cent,,,,, MPR 7: MPR 7: MPR 7: MPU 7: MPM 8: MPM 8: MPM 8: Output gap Percentage deviation from HP trend,, - -,,, 7 8 9,

23 Nominal and real repo rate, April and July 8 From -qtr CPI forecast, per cent 7 Real repo rate Forecast, real repo rate, MPR 8: Forecast, real repo rate, MPU April 8 Nominal repo rate Forecast, nominal repo rate, MPU April 8 Forecast, nominal repo rate, MPR 8: Sources: NIER, Prospera Research AB and the Riksbank.

24 Alternative repo-rate paths Per cent, quarterly averages Main scenario Lower interest rates Higher interest rates Note. Broken lines represent the Riksbank's forecast. Source: The Riksbank

25 CPI Annual percentage change.. Lower interest rates. Higher interest rates. Main scenario Note. Broken lines represent the Riksbank's forecast. Source: The Riksbank

26 Output gap Percentage deviation from the HP trend Lower interest rates Higher interest rates Main scenario Sources: Statistics Sweden and the Riksbank

27 Real repo-rate paths From -quarter CPI forecast, per cent Main scenario Lower interest rates Higher interest rates Sources: Statistics Sweden and the Riksbank

28 GDP growth Annual percentage change, seasonally adjusted data Main scenario Lower interest rates Higher interest rates Black lines show average GDP growth in the periods 98-7 and Sources: 998-7; Statistics, and. Sweden per cent. and the Riksbank

29 Hours gap Percentage deviation from the HP trend Main scenario Lower interest rates Higher interest rates Sources: Statistics Sweden and the Riksbank

30 Hours growth Annual percentage change, seasonally adjusted data Lower interest rates Higher interest rates Main scenario Sources: Statistics Sweden and the Riksbank

31 Employment rate Per cent, seasonally adjusted Main scenario Lower interest rates Higher interest rates Sources: Statistics Sweden and the Riksbank

32 Unemployment rate Percentage of the labor force, seasonally adjusted Lower interest rates Higher interest rates Main scenario Sources: Statistics Sweden and the Riksbank