Svennson Strikes Back

Lars Svennson, deputy director of the Riksbank, has been publicly disagreeing with his colleagues over the proper role monetary policy. The other day he gave a speech at the the BIS trying to clarify the differences in opinion.

I recommend reading the entire speech, but, broadly he believes conditions in Sweden (high unemployment, low inflation) warrant looser monetary policy. His colleagues are concerned that looser monetary policy will 1) encourage households to take on too much debt; 2) the debt will be used to buy houses; and 3) housing prices will rise too much. Their concern is that this creates instability in the financial system and leaves it vulnerable to drops in housing prices.

Svennson notes that currently household debt and housing prices are at stable levels, while unemployment is high, and thus, even within their framework, they should still be advocating looser policy. However, his larger point is that monetary policy isn't a very effective tool for dealing with these problems. He argues that these problems are better remedied by "Macroprudential Policy" initiatives like rules on mortgage lending.

I think this is an important point. It seems like monetary policy officials throughout the world are trying to juggle too many balls; the ECB is really concerned about the fiscal policy of some of its constituent countries. Narrowing monetary policy makers' focus to unemployment and inflation makes it more clear where and when they are failing to provide sufficient demand.