Jansson: Time to improve the inflation target?
"It is important for us to think carefully before we make any more comprehensive changes to Swedish economic policy frameworks. Dismantling a framework can be done in a very short space of time, but building one up takes a long time and often involves major adjustment costs." These are the comments of Deputy Governor Per Jansson as he talks at Handelsbanken today.
"I am convinced that the kind of flexible inflation targeting pursued by the Riksbank and most other central banks today will be the most effective approach also in the future. This does not mean that everything necessarily has to remain exactly as it is now, however. If we want something to endure, we must be prepared to change it," he continues.
In his speech, Mr Jansson highlights two areas of the Swedish monetary policy framework about which he believes a discussion should be started, based on practical experiences.
- The target variable – "The Swedish CPI is constructed in a way which means the effect of an interest-rate change on inflation heads in the "wrong direction" in the short term. The Riksbank has therefore regularly allowed inflation indices other than the CPI to guide interest-rate decisions," says Mr Jansson. He points out that major interest-rate movements mean that CPI inflation can be relatively far from 2 per cent over long periods. Economic participants could therefore begin to question whether the Riksbank is truly attempting to stabilise CPI inflation around the target. Substantial and long-term variations in the CPI can also lead to a misleading image being disseminated about actual inflationary pressure in Sweden and to wage formation being impaired. One option is to allow an inflation measure upon which interest-rate changes do not have such a direct impact to not only represent the steering variable, but also the target variable," Mr Jansson argues.
- An interval surrounding the target – "The previous tolerance interval was removed on the grounds that there was widespread understanding for the fact that the monetary policy was being pursued amidst considerable uncertainty, and that the Riksbank cannot fine-tune the economy and inflation. However, that this is the case is something we may need to remind people of all the time. For this reason, there are grounds for considering whether the Swedish monetary policy framwork should be complemented once again by some kind of interval," Mr Jansson says.
If the discussion were to eventually conclude that it is appropriate to make changes within these areas, this would not have drastic consequences for the monetary policy framework as it is. Instead it would be more a case of adjustments and improvements which could be accommodated within the framework of flexible inflation targeting," emphasises Mr Jansson.
Read the entire speech "Time to improve the inflation target?" and the slides shown by Mr Jansson at Handelsbanken via the links below.
