Paul Krugman: In 2010 Sweden’s economy was doing much better but unemployment was still high, and inflation was low. Nonetheless, the Riksbank — Sweden’s Fed — decided to start raising interest rates. There was some dissent within the Riksbank over this decision. Lars Svensson, one of the world’s leading experts on Japanese-style deflationary traps, warned that raising interest rates in a still-depressed economy put Sweden at risk of a similar outcome. - [Then] Swedish unemployment stopped falling; deflation eventually arrived. The rock star of the recovery has turned itself into Japan. The bank’s governor declared that it was all about heading off inflation. But as inflation slid toward zero, [there came] a new rationale: tight money was about curbing a housing bubble, to avert financial instability. [So], as the situation changed, officials invented new rationales for an unchanging policy. In short, this was a classic case of sadomonetarism in action.
Posted on: Mon, 21 Apr 2014 15:51:44 +0000
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