Svensson: Monetary policy and employment – monetary policy is too tight
Monetary policy is and has been too tight, which has led to unemployment becoming much higher than necessary and to inflation undershooting the target. This was stated by Deputy Governor Lars E O Svensson on Wednesday, at a speech to the Swedish Trade Union Congress, LO, where he gave his views on how monetary policy could contribute to lower unemployment. At present, when unemployment has been high over a long period of time, we need a particularly expansionary monetary policy, a large demand for labour and an inflation rate that is temporarily allowed to overshoot the target to bring down unemployment to a long-run sustainable rate, pointed out Mr Svensson. As monetary policy has little effect on household debt in the short run and with low and stable inflation no effect in the long run, this would not tangibly increase the risks from household debt.
Mr Svensson said that it is evident that monetary policy in Sweden is and has been too tight from the real short interest rates, which have been higher in Sweden than in the euro area, the United Kingdom and the United States from 2010 onwards. This is despite the fact that inflation in Sweden is lower than in these economies at the same time as unemployment is as high as in the United Kingdom and the United States. Mr Svensson said that the cost of the tight monetary policy in terms of unemployment is high, both in a short and long-run perspective. In practice, monetary policy has to some extent neglected the price stability target since 1997 and led to unnecessarily high unemployment.
Mr Svensson also discussed the research that shows that monetary policy normally has little impact in the short run on housing prices and household indebtedness, and when inflation is low and stable, it has no long-run impact. This means that a tight monetary policy aimed at limiting household indebtedness will lead to inflation being too low and unemployment too high, without tangibly reducing potential risks arising from household indebtedness. Monetary policy should therefore not be used to try to influence housing prices and indebtedness.
Mr Svensson said that monetary policy should aim to stabilise inflation around the target and unemployment around a long-run sustainable rate. It should also be aimed at keeping inflation on target on average over a longer period, to avoid repeating the policy that, according to Mr Svensson, has led to unnecessarily high unemployment since 1997. The long-run sustainable rate of unemployment depends on how the labour market works and on structural conditions, and it must be estimated using empirical methods.
In conclusion, Mr Svensson said that the problems with poorer matching, increasing long-run unemployment and a larger share of vulnerable groups on the labour market are arguments in favour of a more, not less, expansionary monetary policy so that one can bring down the high unemployment to a long-run sustainable rate. At present, when unemployment has been high over a long period of time and is becoming entrenched, we need a particularly expansionary monetary policy, a large demand for labour and an inflation rate that is temporarily allowed to overshoot the target to bring down unemployment. As inflation on average has been too low so far, this also has the advantage of contributing to average inflation coming closer to the target.
Read the whole speech
