Monetary & Fiscal Policy shouldn´t mix

Sweden´s finance minister thinks it should:

Sweden’s finance minister said it’s time to look deeper into the framework of central bank independence.

In an interview on Thursday in Stockholm, Magdalena Andersson argued that more research and discussion will be needed on how central banks and governments can coordinate policy responses in a crisis situation.

“Looking back on the wave of reforms that made central banks independent, it’s obvious today that it wasn’t well thought through,” she said. “There might be situations when fiscal and monetary policy need to work together in a way that’s not possible under the present regulation.’’

She goes on to say:

Sweden, for example, already has a stability council comprised of the Riksbank, the Financial Supervisory Authority and the debt office, which could serve as a forum, according to Andersson.

“Then you can discuss whether that is sufficient or not,” she said. “I’m not ready to suggest any new policy suggestions, but it’s a research field where I would like to see more research.’’

It´s ironic that Sweden was doing better than most advanced countries central banks, until it decided that it should be concerned with asset (home) price bubbles in late 2010.

The chart shows that the situation, which was on a good “track”, deteriorated significantly once monetary policy turned contractionary and NGDP growth relented.

It would be much better if she showed concern about the Riksbank choosing an improved monetary policy framework, and not try to bring fiscal policy into the mix.


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