Working Paper: CEPR ID: DP9756
Authors: Lars E.O. Svensson
Abstract: My lessons from six years of practical policy-making include (1) being clear about and not deviating from the mandate of flexible inflation targeting (price stability and the highest sustainable employment), including keeping average inflation over a longer period on target; (2) not adding household debt as a new (intermediate) target variable, in addition to inflation and unemployment ? not ?leaning against the wind,? which is counterproductive, but leaving any problems with household debt to financial policy; (3) using a two-step algorithm to implement ?forecast targeting?; (4) using four-panel graphs to evaluate monetary policy ex ante (in real time) and ex post (after the fact); (5) taking a credible inflation target and a resulting downward-sloping Phillips curve into account by keeping average inflation over a longer period on target; and (6) not confusing monetary and financial policy but using monetary policy to achieve the monetary-policy objectives and financial policy to maintain financial stability, with each policy taking into account the conduct of the other.
Keywords: financial stability; household debt; inflation targeting; monetary policy
JEL Codes: E42; E43; E44; E47; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher policy rate (E43) | increase household debt ratios (G51) |
| not adhering to inflation target (E31) | higher average unemployment (J64) |
| higher policy rate (E43) | lower inflation (E31) |
| lower inflation (E31) | increase real debt levels (H63) |
| higher policy rate (E43) | lower nominal GDP (E19) |
| credible inflation targets (E31) | downward-sloping relationship between inflation and unemployment (E31) |
| anchored inflation expectations (E31) | downward-sloping relationship between inflation and unemployment (E31) |
| using two-step algorithm for forecast targeting (C53) | improve policy effectiveness (D78) |