Today’s Must-Must-Read: Lars E.O. Svennson: Riksbank Deputy Governor Jansson Again Tries to Defend the Indefensible…

…There were really, in real time, no comments suggesting that it would be a stupid idea to increase the interest rate.

But in real time, the Riksbank’s inflation forecast was below the inflation target and unemployment and the unemployment forecast were far above the Riksbank’s estimate of a long-run sustainable rate…. My colleague in the Execeutive Board, Karolina Ekholm, and I indeed dissented from this tightening policy with very clear and logical arguments, namely that easier policy would in this situation lead to better target achievement…. Riksbank and the Fed FOMC forecasts for inflation and unemployment were very similar at the time. Given these similar forecasts, the Fed obviously did the right thing, keeping the policy rate very low and starting to prepare for QE2, whereas the Riksbank did the wrong thing, tightening. Or is Jansson suggesting that the Fed should have followed the Riksbank example?
 
Jansson refers to high GDP growth as a reason for tightening in the summer of 2010. But as Paul Krugman says… Jansson seems to make “a fundamental error, confusing levels with rates of change.”… Jansson… suggests that Krugman should look at the facts before criticizing the Riksbank. It seems that it is Jansson that should look at the facts. Jansson’s previous attempts to defend Riksbank policy, including his strange suggestion that the tightening was not motived by concerns about household debt and housing prices, have been discussed here, here, and here. The cost and benefit of the Riksbank’s leaning against the wind because of concerns about household debt are examined here (with the use of the Riksbank’s own estimates, the cost can be shown to be about 250 times the benefit).