Jansson: The Riksbank's monetary policy strategy – in tune or out of tune with the rest of the world?
The view that monetary policy can support macroprudential policy by "leaning against the wind" has become increasingly common in the international debate. This was observed by Deputy Governor Per Jansson in a speech at SEB on Monday.
Was the strategy for monetary policy that was formulated in the decades before the crisis – and which long appeared so successful – actually too narrow? Does monetary policy need to put greater effort into preventing financial imbalances from arising? In his speech, Mr Jansson described the lively international discussion now being conducted on this question among central banks and in the academic world. He feels that this discussion has had surprisingly little impact on the debate in Sweden.
Most people agree that macroprudential policy should be the first line of defence against financial imbalances. But an increasing number have also begun to take the view that monetary policy may need to give macroprudential policy support by, as it is often called, "leaning against the wind". Mr Jansson has considerable sympathy for these views and he feels that the Riksbank's strategy has been well in line with the international debate.
"In my opinion, it is quite simply a question of which strategy provides the best conditions for the Swedish economy to develop in the best possible way. A policy that "leans against the wind" essentially entails avoiding imbalances that would lead to very negative effects on GDP, unemployment and inflation."
Mr Jansson noted at the same time that a monetary policy that leans against the wind is not free of complications and said that even if one should in principle take financial risks into account in the monetary policy decisions, this does not mean the decisions will be easy.
"What tips the balance will depend on the specific situation at each time a decision is made. If we use the current situation as an example, inflation has recently been surprisingly low, and this is from a level that was already well below our target. The further inflation is from the target, and the longer it remains so, the greater the weight this scale will carry, despite the remaining risks linked to household indebtedness and the housing market."
Read the whole speech: The Riksbank's monetary policy strategy – in tune or out of tune with the rest of the world?
