Jansson: My view on inflation targeting
Deputy Governor Per Jansson held a speech at Karlstad University on Thursday, in which he described his view on inflation targeting. He observed that the policy of inflation targeting, which was introduced in Sweden almost twenty years ago, has worked well. “However”, the deputy governor pointed out, “when one has got used to a particular system over a long period of time, it is fairly natural to start looking for faults and begin to wonder whether it might not be possible to make some modifications and improvements”.
Mr Jansson discussed and responded to three types of criticism recently put forward against inflation targeting and its framework. Firstly, that the Riksbank is accused of having an inbuilt tendency to set the interest rate too high, which is said to have caused unnecessarily high unemployment. Secondly, that the inflation target should be raised and supplemented with a numerical target for employment. Thirdly, that monetary policy is said to have recently been unclear and difficult to interpret.
In conclusion, Mr Jansson summarised his view of the possibilities of inflation targeting – what it can achieve and what we can expect from it. The main benefit of inflation targeting, Mr Jansson claimed, is that it provides a nominal anchor for the economy – a guideline for price-setting and wage-formation – something that was lacking twenty years ago. The deputy governor argued that this had provided a substantial contribution to the good development of the Swedish economy following the crisis in the early 1990s.
In addition to keeping inflation low and stable, monetary policy should help to keep the economy in balance by dampening fluctuations in economic activity. However, Mr Jansson argued that this should be done by means of "coarse tuning", rather than by means of fine tuning. "Placing considerable emphasis on trying to fine tune the real economy around an uncertain numerical measure of long-run employment, potential GDP or equilibrium unemployment can give an impression of clarity, but is an overly simplified representation of monetary policy and requires knowledge that we do not have today", he said. Conducting coarse tuning, Mr Jansson argued, also means that it at times may be necessary to react to risks, even if these risks are not possible to quantify within a particular analytical framework.
Read the entire speech in the PDF file.
