Jansson: Perspectives on the Riksbank’s monetary policy
The discussion on monetary policy and central bank activities will be intensive over the coming years, both internally in individual countries and internationally. This was observed by Deputy Governor Per Jansson when he held a speech on Friday at the Centre for Business and Policy Studies as part of the seminar "Choices for monetary policy". The Riksbank has in recent years received an unusual amount of media coverage and Mr Jansson spoke in his speech about some of the important and fundamental questions regarding monetary policy that have been debated in the media.
It has been claimed, for instance, that the Riksbank tends to be over-zealous in combating inflation and that inflation has therefore been too low and unemployment unnecessarily high, seen over a longer period of time. It has also been claimed that the Riksbank, in taking into consideration risks linked to household debt, has included factors in its repo-rate decisions that should not have been considered.
Mr Jansson said that the Riksbank has not exaggerated its inflation combating and that the average outcome for inflation must be regarded as acceptable, in that a large part of the deviation from target is due to interest rates falling more than they have risen. In Sweden, household mortgage interest expenditure is included in the CPI and this means that CPI inflation initially falls when the Riksbank cuts the repo rate. If this effect "in the wrong direction" is discounted, the average rate of inflation is 1.8 per cent. Mr Jansson also noted that the experiences of other countries in connection with the financial crisis show that excessive debt can result in a situation with weak demand, high unemployment and low inflation. He said that giving consideration to risks in this area is thus entirely in line with the Riksbank's objectives and mandate. He also noted that the Riksbank's aim to consider risks linked to household debt and the housing market is well in line with the international discussions in the wake of the financial crisis.
Mr Jansson also discussed other objections to considering risks linked to household debt in the repo-rate decisions, for instance, that the policy rate has too limited an effect on these risks. Mr Jansson suggested that the effect of the policy rate varies, depending on the specific circumstances. In some situations, fairly limited increases may have an effect, particularly if the central bank combines them with communication emphasising that current developments are perceived as cause for concern. Mr Jansson said that this was precisely the policy the Riksbank had conducted.
In conclusion, Per Jansson noted that we are internationally in what one might call a formative stage with regard to macroeconomic policy in general and monetary policy in particular. He emphasised that it is already clear that monetary policy will not be conducted in exactly the same way as prior to the crisis – when the policy rate was in principle set with consideration to the short-term development of the economy, and when financial stability was more or less taken for granted. It is likely that central banks' operational frameworks for monetary policy will be both slightly more flexible and slightly more complex than they were before.
He said that we do not yet know exactly where this process will take us, and how central bank operations will look in detail, say, twenty years from now. What we can say with certainty is that the discussion on monetary policy and central bank activities will be intensive over the coming years, both internally in individual countries and internationally. It is important that this discussion is unbiased and modulated and conducted in a good and positive spirit, concluded Mr Jansson.
Read the entire speech.
