Why leaning against the wind is the wrong monetary policy for Sweden

Sweden has pursued a tighter monetary policy than is necessary to achieve the inflation target in order to reduce risks associated with household indebtedness. The net benefit to ‘leaning against the wind’ has been hotly debated; this column argues strongly against it. By reducing inflation, the Riksbank has in fact increased household debt, and contractionary pressure has worsened the employment situation. The author estimates that the benefits to leaning are worth only 0.4% of the costs.

There is a lively ongoing debate about whether raising interest rates beyond the level needed to stabilise prices – ‘leaning against the wind’ – is a justified modification of flexible inflation targeting (as discussed in Smets 2013). In a new paper, I explain why leaning against the wind is the wrong monetary policy for Sweden (Svensson 2014).

According to the Riksbank’s own recently published calculations, the benefit of this policy – in the form of lower risks from household debt – is completely insignificant compared to the cost in terms of higher unemployment and lower inflation (Sveriges Riksbank 2014). Since inflation has fallen much below the inflation target and households’ inflation expectations, the policy has instead actually increased households’ real debt burden and, if anything, increased any risks from the debt. Thereby it has made more difficult the work of the Finansinspektionen (FI, the Swedish FSA) to reduce any such risks.

‘Leaning against the wind’ is a monetary policy that is tighter than that necessary to achieve the inflation target and to support Swedish economic policy’s most important goal: full employment. It thus leads to lower inflation than the inflation target and a higher unemployment rate than is sustainable in the long-run. The Riksbank has been leaning against the wind rather aggressively in the last few years, with the purpose of reducing household indebtedness and thereby any associated risks.


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