Lars E.O. Svensson on Sweden: bank rates, unemployment and inflation.

Lars:

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).

Now this author seems to have it backwards, but he was careful to mention raising rates only once inn the full article. Tightening is not always the opposite of keeping bank rates low. The Swedish bank also issued other sets of rules that restricted excessive indebtedness. But still, we can see in May 2010, when the bank raised rates, inflation also rose. The opposite happened on the way down. The inflation rate seems a bit lower when the bank returned to low rates, is this out of trend? Not with Europe in general, maybe for Sweden, but I have no way to tell since the crash would have changed pricing considerably. But Lars has no way to tell either.

Then the author calculates the debt relief from inflation.

A lower than expected inflation rate contributes to increasing the real debt burden, that is, debt relative to the general price level

 From where to where does he calculate the gain or losses from inflation? If the homeowner took out a loan in Jan 2010, then looked at both rate rises and inflation rises, he gains. Taking out a loan when inflation and rates are the highest, the homeowner loses.

But, it seems to me, not having the data, the the bank is reacting after the fact in 2010, so most home owners stood to gain, over all.  They lose a bit of inflation at the end, but make up for it with a lower captured rate.

What about unemployment?

This is not seasonally adjusted.  But we can see a half point drop in unemployment, after the rate hike! Still, this seems backward from the authors conclusion.




Charts from Trading Economics. I could double check my sources, but I am not going to bother.  This is the fourth of fifth time the author has it backwards, and it is time the authors check there sources, and check their Y axis.

Romer and Romer pioneered the data removal and shifting exercise, claiming Milt Freidman pioneered the concept. I think its statistical fraud; does not matter that Uncle Milt did it. I read Uncle Milt's book a long time ago, and I do remember he would mention some normal central bank bungle, then skip ahead to bad data and attribute that to the bank.  So, it is no wonder that we have suffered through decades of blinded idiots at the helm of the Fed. The Fed is a huge monopoly, it mostly causes damage when economists tell it to enter the market with full force.  Most economists do not understand maximum entropy networks, so mathematicians should correct this, pronto.