Saturday, July 22, 2006

Morgan Stanley on Nordic Economies

Morgan Stanley have for the last two days published analysis of the Nordic economies-see here and here- or at least Finland, Denmark, Sweden and Norway (The fifth and by far tiniest Nordic country, Iceland, was left out).

They point out that Finland and Denmark both have their monetary policy set by the ECB as Finland have adopted the euro while Denmark have pegged its currency to the euro. Sweden and Norway have by contrast independent monetary policies. One of their conlusions from Morgan Stanley is that the temporarily lower inflation in Sweden combined with its inflation targeting framework have put interest rates further below the neutral rate than in Denmark and Finland. That is also the reason as to why the Swedish krona is undervalued. Both of these factors will boost growth just in time for the coming election, but the inevitable bigger tightening will later slow growth significantly. This is exactly what I've been arguing for some time now.


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