One more thing about Swedish monetary policy. I showed in a previous post that the Swedes seem to be effectively targeting the level of nominal GDP. A nice thing about level targeting is that it has "memory," that is monetary policy does not forget past deviations from its target and works in subsequent periods to make it up. Thus, it requires higher-than-normal catch-up growth if its targeted nominal variable it undershoots its target and vice versa. This catch-up growth can be seen for Sweden in the figure below which shows the year-on-year growth rates of nominal GDP:
The Swedes appear to be aiming for just under a 5% nominal GDP growth. Starting in late 2008 and going into 2009, nominal spending collapses and contracts at about a 5% growth rate. To make up for this loss in nominal spending, the Riksbank nudges up nominal GDP growth up to almost 10% in subsequent quarters. Nominal GDP growth still remains elevated but now appears to be slowing down to its trend rate. Contrast this path with that of the U.S. nominal GDP. The U.S. also sees a sharp drop in nominal spending, but the Fed only allows it to return to its trend growth rate value of about 5%. There is no catch-up growth in nominal spending. Is it any wonder the U.S. economy remains sluggish?
Update: To be clear, the Riksbank does not explicitly target the level of nominal GDP. Effectively, though, it policies come out doing something close to what would be done under a nominal GDP level target. Thus, we can look to Sweden to get an idea of what catch-up growth would look like under a nominal GDP level target.
Update: To be clear, the Riksbank does not explicitly target the level of nominal GDP. Effectively, though, it policies come out doing something close to what would be done under a nominal GDP level target. Thus, we can look to Sweden to get an idea of what catch-up growth would look like under a nominal GDP level target.
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