Swedish central bank: “The sins of the father”

As the charts clearly indicate, Sweden fell into the “inflation obssesion trap”, which usually makes the mistake of tightening policy because of a supply shock (oil in this case) and also gets all “finicky” about asset prices.

Given the course of NGDP, the rise in rates from late 2005 to mid 2007 were the adequate response to keep NGDP on the target path. With the rise in oil prices in 2007-08, the Riksbank mistankenly tightened policy. That had the effect (like in most countries who acted the same way) to depress aggregate demand (NGDP).

The mistake was quickly corrected so that by the end of 2009 Sweden took the path “back to trend”. Another reaction to oil prices (and “bubble” worries”) sent the Riksbank on the “road to perdition”.

sweden-ngdp1

 

 

 

 

 

 

 

 

 

 

Hopefully this time they´ll succeed!

 

sweden-cpi

About the Author

Marcus Nunes
João Marcus Marinho Nunes is a partner of Phynance Estratégias Quantitativas e Investimentos and a professor of Economics at Fundação Getúlio Vargas in São Paulo, Brazil. He also blogs here: http://thefaintofheart.wordpress.com/

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