Paper (pdf) Appendix (pdf) Data for figures (Excel)
First version: July 2011
This version: January 2012
Brookings Papers on Economic Activity, Fall 2011, 289-332.
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. 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 find the arguments against the Federal Reserve’s easing and the
arguments for the Riksbank’s tightening unconvincing. 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. In short, the
Riksbank did the wrong thing but was lucky, whereas the Federal Reserve did the
right thing but was unlucky.
JEL Classification: E52, E58, E42, E43,
E47
Keywords: Flexible inflation targeting, forecast targeting, policy
evaluation
Paper (pdf) Appendix (pdf) Data for figures (Excel)