Must-read: Lars Svensson: “Two serious mistakes in the Goodfriend and King review of Riksbank monetary policy”

Must-Read: Is it really the case that Goodfriend and King never asked Svensson whether his dissents and calls for lower rates were statements about the direction in which policy tools should move or statements about what the optimal value of policy tools should be? If they never asked him, that seems to me to be quite unprofessional. If they did ask him, then it seems there was, somewhere along the way, a major failure to communicate:

Lars E.O. Svensson: Two serious mistakes in the Goodfriend and King review of Riksbank monetary policy: “Marvin Goodfriend and Mervyn King presented their review of the Riksbank’s monetary policy 2010-2015 on January 19….

…They unfortunately start their evaluation by making two serious mistakes…. When finding the Riskbanks response… ‘not unreasonable’, Goodfriend and King… confuse rates of change and levels…. GDP and exports had started to grow in 2010 (although the year-over-year growth rates in quarter 1 of 2010 were not exceptionally high, 2.9% for GDP and 4.2% for export). However, the more important levels were not high but quite low…. The unemployment rate, a more reliable indicator of slack in the economy, was about 9%… making the unemployment gap about 2.5%. To start a rate hike from 0.25% to 2% in such a situation, with large slack in the economy and inflation not far from its target, is definitely not reasonable…. Just stating that the Riksbank rate hike was ‘not unreasonable,’ ignoring the actual GDP and export level data as well as the unemployment rate known at the time, and not providing a thorough evaluation of the hike, is a first serious mistake….

A second serious mistake of Goodfriend and King [is] to state that the rate hikes were ‘broadly accepted by all members’…. I know for sure that I did not share the view, and this is evidenced in my November 2010 speech and repeatedly in the minutes…. I instead advocated a major redirection of policy. One may also note the headline ‘Disaster path’ (‘Katastrofbana’) on the front page of the Swedish newspaper Svenska Dagbladet on September 27, 2010. This referred to my warning about the dire consequences of the majority’s high policy-rate path in an interview (in Swedish) in the newspaper that day. The headline and interview hardly indicates that I ‘broadly accepted’ the rate hikes. As evidence supporting their conclusion, Goodfriend and King state….

The dissenters on the Executive Board never voted for a level of the current repo rate more than one quarter of a percentage point below that actually set by the majority….

A vote for a slightly lower rate than that adopted by the majority cannot subsequently be used as evidence that a dissenter did not believe that a very different repo rate was optimal…. The repo rate… I voted for was only the first step in the right direction towards an approximately optimal rate and path; it was not a complete step to such a rate and path…. I advocated a stepwise procedure towards a rate and path that would eventually make the corresponding forecasts for inflation and unemployment ‘look good’. Unfortunately, I never gained a majority for even the first step…. Voting for a rate of 1.25% or 2% didn’t mean that it was the best rate, but that it was better than 1.5% and 2.25%, and a first step to a much lower rate…

January 25, 2016


Brad DeLong
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