In this guest post, economics professor and former Bank of England economist Tony Yates talks about the potential for “cryptocurrencies” to compete with government-backed money, and what central banks can do about it.
It’s not usually a good thing when your biggest export market, biggest source of foreign direct investment, and the country that owns your entire banking oligopoly experiences a major economic slowdown. Yet New Zealand, at least in the past decade or so, watched its fortunes wane as Australia’s mining sector boomed, while the bust in Oz has gone hand-in-hand with stronger growth in Middle Earth.
You might think a central bank looking at inflation significantly below its target, a relatively weak jobs market, and a policy interest rate well above zero would be keen on loosening up. In the case of Australia, however, you would be wrong.
Compared to most rich countries, Sweden handled the twin challenges of the 2007-8 crisis and the never-ending euro crisis with aplomb. The share of people in Sweden with a job is at all-time highs. Real output per person is at all-time highs, and has grown much more than in most other rich countries over the past ten years. Underlying inflation is essentially at its long-term average. The trade surplus remains massive. And Swedish house prices continue to float into the stratosphere. Yet despite all this, Sweden’s central bank has been unusually aggressive in trying to stimulate its economy by cutting interest rates far below zero, buying assets, and cheapening its (already undervalued) currency. We recently had the chance to talk to a former Swedish central banker about this. He suggested the Riksbank could potentially justify its behaviour as an attempt to heal structural problems in Sweden’s jobs market.
Good idea: More reactive than a quantitative target; can signal long-term commitment to policy; potentially reduces purchases required if market believes your yield target is credible; potentially good for effectiveness of fiscal policy; potentially good for banks as it can imply a steeper yield curve; and allows for an “automatic exit” from the policy if everything goes to plan.