policy advice and economic crises. how do they interact? the case of sweden 1970-2025
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Policy advice and economic crises. How do they interact?The case of Sweden 1970-2025
ECONOMICS AND POLICY ADVICE – A FAREWELL SEMINAR FOR MR. ANTTI SUVANTO
Bank of Finland, Helsinki, 11 April 2016.
Lars Jonung, Knut Wicksell Centre, Ekonomihögskolan, Lund University, Lund
It is a great honour for me to take part in this farewell seminar for Antti Suvanto
For me: reunion seminar
A long history of contacts with Finnish economists: in the 1970s Jouko Paunio and Pentti Kouri, in the 1980s Sixten Korkman, Johnny Åkerholm, H C Blomqvist, Antti Suvanto, Seppo Honkapohja, et al.,in the 1990s Pentti Vartia and I got a grant, Jaakko Kiander, Vesa Vihriälä, Mika Tujula, and in the 00s I went to DG ECFIN in Brussels: Sixten Korkman, Anne Brunila and Heikki Oksanen and Antti.And in Lund/Mölle I have met some of you.
Policy advice and economic crises. How do they interact?The case of Sweden 1970-2025
My lecture is focused on stabilization policies (macro):
a) How policy advisors (advice) are influenced by economic crises and
b) How economic crises are influenced by policy advisors (advice)
4
Policy advice and economic crises. How do they interact?The case of Sweden 1970-2025
A typo – a printing error – in my title?
A policy advisor should be able to look back as well as ahead and:
a. forecast the next economic crisis and b. forecast the policy response to the next crisis and c. forecast the policy advice emerging after the next future crisis
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Why look at Sweden? Sweden is well suited for a study the interaction of policy advice (policy
advisors) and policy outcomes: 1. The Swedish political system has allowed the government to directly
control the instruments of fiscal and monetary policies, and in particular to influence the central bank until it became independent.
2. The prevalent Keynesian (Stockholm School) traditions and views have
given the government many instruments and much discretion to use when framing policies. Strong public belief in the power of economic policies.
3. The Swedish tradition of openness and debate concerning public affairs
has induced policy makers to publish their memoirs and views. This literature represents an extremely fruitful source for research. Here policy makers reveal, sometimes surprisingly frankly, their thinking and their views on the proper conduct of fiscal and monetary policies.
The best book by a Swedish minister of finance ..
Back cover text:
A frank, humorous, informed and unsentimental account – just like Feldt himself...
Baksidestexten på Feldts memoarer:
Kjell-Olof Feldt, Sveriges finansminister under större delen av 1980-talet, avgick under dramatiska omständigheter i februari 1990. Nu skriver han om sin tid i regeringen. Hans bok liknar ingen annan politisk memoar.Den är frank, humoristisk, kunnig och osentimental som Feldt själv.
The head of the Riksbank explains a 500 % overnite rate …
The prime minister explains what he would have done if he just knew…
The minister of taxes explains how he saved Sweden …
The prime minister explains how he cleaned up the mess …
Can we trust these memoirs?
We do not need to trust the memoirs.
We have the record of changes in the instruments, the goals and the institutions for policy-making.
It is the thinking of policy makers that we get from the memoirs – or more correctly how they think they thought
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Why look at Sweden?
Sweden is unique
Through a series of five economic crisis 1970-2015, Sweden went from extreme Keynesianism to extreme rule-bounded anti-Keynesianism in less than 50 years.
From unrestricted fiscal and monetary policies to restricted polices.
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Analytical frameworkWhich is the proper one?
How should we analyze this pattern – as social scientists – as economists?
It is learning process involving two actors:
1. Policy-advisors (the economics profession)2. Policy-makers (the government and the central bank)
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Analytical frameworkWhich is the proper one?
It is learning process – a collective learning process. How do you model it?
Econometrics?Rational expectations?Model with ”representative agents” with
eternal lifespans?DSGE-approach?
Warning for the next picture. Boxes and arrows!
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Figure 1. The policy learning process - an outline.
Lessons fromprevious policies.
Macroeconomicdisturbance ("shock")
affects the economy.
The policy response isbased on current policy llessons learned.
The effects of the policy response appear
with some time lag.
New lessons arelearned when evaluating
the effects of the policy.
New macroeconomicdisturbance.
New policy response. Effects of the policy response.
Newa lessons.
Macroeconomic Policy response The effects of Policy learning disturbance the policy (Lessons)
(1) (2) (3) (4)
Macroeconomicdisturbance
(1)
Policyreaction
(2)
Policyeffects
(3)
Policylearning
(4)
1969-70:Outflow of foreign reserves. Deteriorating current account balance. Tendency towards inflation.
1970-72:Policy of restraint. Contractive fiscal and monetary policy.
1971-73:Rising unemployment.”The lost years.”
Lessons from the Bretton Woodssystem: External balance and a fixed exchange rate.
Lessons of “the lost years”:Expansive Keynesian fiscal policy suitable to maintain full employment.
1973-74:OPEC I.Oil price shock.Supply disturbance.
1974-76:Policy of “bridging over”. Expansion via fiscal policy.
1977-78:”Costs-crisis.” Growing budget deficit and crisis in different industries.
Lessons from OPEC I:Expansive fiscal policy creates imbalances. Devaluations “work”.Devalveringar ”fungerar”.
1979-80:OPEC II.Oil price shock.Supply disturbance.
1980-82:Fiscal austerity package. Devaluation in 1981. Offensive “super-devaluation” in 1982.
1983-85:Strong inflationary impulse. Rising profits.
Lessons from OPEC II: Rule-bound policy based on a fixed exchange rate. Hard currency policy.
Episode 1
Episode 2
Episode 3
Macroeconomicdisturbance
(1)
Policyreaction
(2)
Policyeffects
(3)
Policylearning
(4)
1986-90:Boom due to credit expansion. Overheating. Real interest rate shock. Financial crisis.
1990-92:Strong defense of the fixed krona rate. Government support to the financial system.
1991-95:Rapidly increasing unemployment and budget deficits. Deflation. Floating krona rate.
Lessons of the 1990s:Institutional reforms, independent Riksbank, a stricter budget process. Floating krona or totally fixed rate.
2008-10:Global financial crisis. Sharp fall in exports. Threats against the banking system.
2008-10:Expansionary monetary policy. Tight fiscal policy. Government support to the banking system.
2011-13:Rapid recovery.Strong public finances. Persistent unemployment.
Lessons from the global financial crisis:New regulation and supervision of the banking system. Macroprudential regulation.
The future:Next disturbance or crisis of unknown nature.
Tight fiscal policy. Expansionary monetary policy.
Unknown outcome.
New lessons of tomorrow’s crisis.
Episode 4
Episode 5
Episode 6
The policy learning process 1970-2015
Major conclusions.
1 Crises are the driving force behind the learning process
Economic crises which forced the policy-advisors and policy-makers to evaluate different policy options and thus to search for lessons from the past.
The policy learning process 1970-2015
2. The sources of information for the learning process
The main source of information was the interpretation of the most recent previous domestic economic crisis and its policy outcome.
The policy learning process 1970-2015
3. The character of the learning processa) Learning was built on a comparison between the current crisis and the previous crisis. Learning was therefore backward-looking and of a short-run character: it excluded episodes, that is, information from events further back in time.b) Learning was primarily of a negative character: the lesson was to avoid repeating what was perceived as policy mistakes during the previous crisis (”error-learning”).
The policy learning process 1970-2015
4. The macroeconomic consequences of the learning process • Learning determined the policy response and thus
influenced the path of the macro-economy. Two cases should be distinguished:
• a) When the new crisis was similar to the old crisis, the “mistakes” from the previous crisis were avoided.
• b) When the new crisis differed significantly from the old crisis, the learning process risked creating instability. In this case, policy-makers met the new crisis with the support of misleading lessons. The learning process then became a potential source of instability.
The policy learning process 1970-2015
5. Did policy-makers and policy-advisors learn to learn?
It is difficult for them to learn to learn. They have a short time span in power.
Then they are replaced – by elections or by retirement.
The policy learning process 1970-2015
How can policy-advisor play a more constructive role in preventing the next crisis?
Improve the collective memory:1. The role of the university? 2. Fiscal councils? Central banks?3. Employ old and retired professors/policy-advisors (70+) in the ministry of finance/central bank to sit in the coffee room and talk with the young civil servants fresh out of university?…
Now to the next crises
The learning process is a never-ending story
Learning is a continuous process.
It never ends – unless we have a crisis-free future.
We know for sure that there will be new crisis.
Let us look upon the lessons we thought we learnt from the past crisis. The Lehman crash – the Great Recession – the global financial crisis of 2008
Lessons from the most recent crisis 2008
Now to the next crises…
The present majority view:
Inflation targeting should be the goal of the central bank. And during a crisis the central bank should provide ample liquidity.
Macroprudential regulation should restrict the growth of credit.
Will these lessons from the global financial crisis of 2008 be the correct one?
Now to the next crises…
My forecast for Sweden:
These policy lessons are contributing to serious and growing financial imbalances in Sweden (and world-wide)
Thus paving the way for the next crisis in 2020 +/- 5 years.
Credit growth in Sweden 1963-2014
50
70
90
110
130
150
170
190
210
230
250
1963
K1
1966
K1
1969
K1
1972
K1
1975
K1
1978
K1
1981
K1
1984
K1
1987
K1
1990
K1
1993
K1
1996
K1
1999
K1
2002
K1
2005
K1
2008
K1
2011
K1
2014
K1
%
Totala krediter (% BNP) Hushållens krediter (% disponibel inkomst)
Real house prices 1995-2014
50
100
150
200
250
300
35019
95K1
1995
K4
1996
K3
1997
K2
1998
K1
1998
K4
1999
K3
2000
K2
2001
K1
2001
K4
2002
K3
2003
K2
2004
K1
2004
K4
2005
K3
2006
K2
2007
K1
2007
K4
2008
K3
2009
K2
2010
K1
2010
K4
2011
K3
2012
K2
2013
K1
2013
K4
2014
K3
Inde
x 10
0 =
1995
Sverige Irland Tyskland Storbritannien USA
Real house prices in the Nordics 1970-2015
Will this time be different?
My forecast: No, it will not be different 2016-2025.
There will be a ”corrrection” in the future.
The policy lessons after the next crisis ?
The policy lesson from the next crisis?a. Control debt/credit?b. Capital controls?c. Freak advice? We have tried demand side policies in various
forms for 1970-2025.
Why not supply side policies?
The future
Will my forecast today turn out to be the correct one?
The future will tell!
Welcome back to a new seminar (farewell to old pre-crisis policy advice) after the next deep crisis!
Policy advice and economic crises. How do they interact?The case of Sweden 1970-2025
ECONOMICS AND POLICY ADVICE – A FAREWELL SEMINAR FOR ANTTI SUVANTO
Bank of Finland, Helsinki, 11 April 2016.
Lars Jonung, Knut Wicksell Centre, Ekonomihögskolan, Lund University, Lund
POLICY LEARNING
Looking ahead through the Rear-View MirrorPublished in 1999 in Swedish
http://www.regeringen.se/content/1/c4/37/48/5ea1caf7.pdf
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