Wednesday, June 18, 2008

Swedish Financial Journalist Cite Austrian School

Gunnar Örn, journalist at Sweden's most prominent business news paper, Dagens Industri argues against inflation targeting, pointing out that it really doesn't make any sense for
central banks to respond to supply chocks with monetary movements pushing inflation in the opposite direction. He explicitly quote the Austrian school as an proponent of that view, writing

"David Davidson lanserade en annan penningpolitisk norm: Den allmänna prisnivån bör inte hållas stabil, utan tillåtas variera i omvänd proportion mot den allmänna produktiviteten....

Även den österrikiska skolan, representerad av Ludwig von Mises och Friedrich von Hayek, byggde vidare på Wicksells teorier och kom till samma slutsatser som Davidson."

Which means: "David Davidson launched another monetary policy norm: The general price level shouldn't be held stable, but should be allowed to fluctuate in opposite proportion to general productivity...

...The Austrian school, represented by Ludwig von Mises and Friedrich von Hayek, also elaborated on Wicksell's theories and came to the same conclusions as Davidson."

Now, I don't know that much about David Davidson, so I don't know how well Örn characterizes his view, but basically it's so far so good. The insanity of fighting productivity increases with money supply increases is in fact a key theme in the Timbro report I mentioned in the previous post.

My problem is instead with Örn's proposed alternative and his assessment of the current Swedish situation. He favors targeting nominal GDP, but while that is better than inflation targeting, the least distortionary monetary policy norm that a central bank could pursue is instead targeting money supply growth, and targeting it at a very low rate. Using this norm, we can see that Swedish monetary policy in fact remains too loose as M2 growth, while slowing from its peaks, remains too high at nearly 10%.

Still, it's nice to see a prominent journalist being aware of the Austrian analysis, even if his conclusions could at most be characterized as semi-Austrian.


Anonymous Anonymous said...

but wouldn't targeting money aggregates open up the question of which definition of money is the correct one? (shostak vs. karlsson etc.)

especially now, where the direction of the us aggregates seems divergent.

the swiss central bank tried money supply targeting and gave up.

6:47 AM  
Blogger stefankarlsson said...

Targeting money supply would of course presuppose a definition of money supply, but since there is a correct definition -the one I believe in-, I don't see that as a problem. Of course, targeting the wrong definition would however not be good.

7:33 AM  

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