Wednesday, June 21, 2006

How Convenient

Yesterday, the Swedish Riksbank raised short-term interest rates to 2.25%, a level which is still unsustainably low considering the rapid monetary expansion it has generated.

Social Democratic party secretary Marita Ulvskog however protested the decision, as did Lars Ohly , leader of the communist Left Party which cooperates with the Social Democrats. To some extent, this reflects the general pro-inflation bias of most leftists. But there is also another motive. This autumn, Sweden holds a general election, which the Social Democrats and their partners, the Left Party and the Green Party risks losing to the centre-right opposition. It is therefore in their political interest that monetary policy remains as loose as possible until the election. Loose monetary policies generally do raise growth in the short run, but in the long run the effect will likely be negative. But because voters are generally myopic in their assessment of the economy, the short-term boost before the election will in political terms for the ruling party be worth the negative long-term effects, even if the latter are much greater.

Never have the political bias in a interest rate recommendation been more obvious than in the latest commentary from Konjunkturinstitutet (The Business Cycle Institute)-a government agency led by Social Democrat Ingemar Hansson. They recommend that the Riksbank abstain from any further rate increases this year, only to be followed by dramatic interest rate hikes starting next year.

Note here that they don't even dispute the need for a "tighter" monetary policy-they just think it should be done after the election. From a politically neutral point of view, the rate hikes should come ASAP, to prevent a dangerous build-up in debt. Are we then to believe that the recommendation from a government agency led by a Social Democrat to wait until after the election is not motivated by a political bias?


Blogger Flavian said...

Unfortunatly the loose monetary policies depress the swedish economy.


As long as the Riksbank rate is too low to control the credit expansion markets will expect tighter money and this will send the price adjusted exchange rate in the sky which in turn depresses employment.

So if one wants the social democrats to loose elections one should thank the Riksbank and it's policy of easy money for that.

10:44 PM  

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