Working Paper: NBER ID: w17823
Authors: Lars E.O. Svensson
Abstract: In the summer of 2010, the Federal Reserve's and the Swedish Riksbank's inflation forecasts were below the former's mandate-consistent rate and the latter's target, respectively, and their unemployment forecasts were above sustainable rates. Given the mandates of the Federal Reserve and the Riksbank, conditions in both countries clearly called for policy easing. The Federal Reserve maintained a minimum policy rate, soon started to communicate possible future easing, and in the fall launched QE2. In contrast, the Riksbank started a period of rapid tightening. I examine the arguments that were raised in opposition to the Federal Reserve's easing, and those for the Riksbank's tightening. Although the Swedish economy subsequently performed better than expected, probably an important reason was that the market implemented much easier financial conditions than were consistent with the Riksbank's policy rate path. Without the policy tightening, performance would have been even better. The U.S. economy meanwhile performed worse than expected because of factors other than monetary policy. Without the policy easing, performance would have been even worse. Thus, the Federal Reserve appears to have followed its mandate in the summer of 2010, and subsequent adverse economic shocks contributed to weak performance of the U.S. economy. In contrast, the Riksbank appears to have deviated from its mandate, but favorable circumstances contributed to an economic outcome with better performance than might have been expected based on policy choices.
Keywords: Monetary Policy; Federal Reserve; Riksbank; Inflation; Unemployment
JEL Codes: E42; E43; E47; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve's decision to maintain a low policy rate (E52) | U.S. economic performance (N12) |
| Federal Reserve's communication of possible future easing (E52) | U.S. economic performance (N12) |
| Adverse economic shocks (F69) | U.S. economic performance (N12) |
| Riksbank's tightening of monetary policy (E52) | economic performance in Sweden (P27) |
| Riksbank's tightening of monetary policy (E52) | inflation in Sweden (E31) |
| Riksbank's tightening of monetary policy (E52) | unemployment in Sweden (J64) |
| Lower-than-expected interest rates (E43) | financial conditions (E66) |
| Riksbank's tightening influenced by biases in forecasts of foreign rates (E43) | Riksbank's tightening of monetary policy (E52) |
| Riksbank's tightening influenced by biases in sustainable unemployment forecasts (E47) | Riksbank's tightening of monetary policy (E52) |