Sweden’s New Inflationary Strategy

Recently, Paul Krugman and others have criticized Sweden’s central bank for pursuing an insufficiently inflationary policy.

It has for long deliberately undershot its consumer price inflation target of 2% because it is worried about high money supply and debt growth. However, increased criticism has apparently changed its mind about that as it lowers its main interest rate from 0.75% to 0.25%.

This will no doubt increase inflation in Sweden, partly through the drop in the krona’s exchange rate, partly through increased debt growth. But the side effect of too high house prices and debt levels will hurt Sweden’s economy in the long run.

This illustrates the problem with strict consumer price inflation targeting. When positive supply schocks pushes down prices, central banks are compelled to respond by pursuing monetary policy that creates unsound levels of debt and asset prices.

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1 Comment

  1. Pingback: The Jefferson Tree | Stefan Karlsson thinks inflation targeting is problematic

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