OVERVALUED: SWEDISH MONETARY POLICY IN THE 1930s

• DOI: http://doi.org/10.1111/iere.12254
• Date: 01 November 2017
• Author: Alexander Rathke,Ulrich Woitek,Tobias Straumann
• Published date: 01 November 2017

INTERNATIONAL ECONOMIC REVIEW

Vol. 58, No. 4, November 2017

OVERVALUED: SWEDISH MONETARY POLICY IN THE 1930s∗

BYALEXANDER RATHKE,TOBIAS STRAUMANN,AND ULRICH WOITEK1

KOF Swiss Economic Institute, ETH Zurich, Switzerland, and CESifo, Germany; University of

Zurich, Switzerland; University of Zurich, Switzerland, and CESifo, Germany

The article discusses Sweden’s monetary policy in the 1930s, which has been hailed as the first and only

example of successful price-level targeting. Our contribution is twofold. First, we argue that the crucial measure

that immediately ended deflationary expectations and enabled a swift recovery was a strong and involuntary

devaluation of the currency, not the adoption of a new monetary policy framework. Second, starting from the

recent literature on monetary policy at the zero-lower bound, we conclude that Sweden’s exchange rate policy

is more relevant for the current discussion than its tentative experience with price-level targeting.

1. INTRODUCTION

The recent financial crisis has led to a discussion about the effectiveness of monetary policy

at the zero lower bound. One of the proposals that has received much attention is price-level

targeting as an alternative to inflation targeting. Notably, Charles L. Evans, President of the

Federal Reserve Bank of Chicago, joined the ranks of those advocating a “state-contingent

price-level target.” According to him, it would help the public’s understanding of the Fed’s

intentions in the current situation if the central bank clearly communicated “an expected path

for prices” (Evans, 2012, p. 147). Blanchard et al. (2013, p. 10) argued that a price-level target

“would allow for higher inflation rates without undermining central bank credibility in the long

run.” And, in 2014, Narayana Kocherlakota, then President of the Federal Reserve Bank of

Minneapolis, showed some sympathy for price-level targeting (Kocherlakota, 2014).2

The current discussion about price-level targeting is linked to the academic research on the

long stagnation of the Japanese economy since the early 1990s. Several macroeconomists have

developed new ideas in order to improve the effectiveness of monetary policy at the zero

lower bound (e.g., Krugman, 1998; Eggertsson and Woodford, 2003). Svensson (2003) provides

a useful summary of all these suggestions and formulates a “foolproof way to escape from

a liquidity trap.” Svensson lists three conditions for a successful strategy: an upward-sloping

price-level target path, a depreciation and a crawling peg of the currency, and an exit strategy.

The gist of his argument is that communicating an upward-sloping price-level target path is

not sufficient—in addition, depreciation is needed as a credible commitment to an increase in

the future price level, which in turn leads to a reduction in the real interest rate by changing

expectations.

This article tries to make a historical contribution to the ongoing debate about alternative

monetary policy regimes. It discusses Sweden’s monetary policy in the 1930s that is said to have

∗Manuscript received March 2012; revised November 2015.

1We would like to thank the editor, two anonymous referees, Stephen Broadberry, Marc Flandreau, Riitta Hjerppe,

Mathias Hoffmann, Peter Kugler, James Malley, Peter Rosenkranz, Samad Sarferaz, Lennart Sch¨

on, Bent Sørensen,

and participants at various seminars and conferences for very helpful comments and suggestions. Please address

correspondence to: Alexander Rathke, KOF Swiss Economic Institute, ETH Zurich, Leonhardstrasse 21, CH-8092

Zurich, Switzerland. Phone: +41 44 632 8623. Fax: +41 44 632 1218. E-mail: rathke@kof.ethz.ch.

2See Ambler (2009), B¨

ohm et al. (2012), and Hatcher and Minford (2014) for a survey of the literature on pioneering

work on price-level targeting. For a thorough discussion of new approaches to monetary policy, see, e.g., English et al.

(2013).

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C

(2017) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social

and Economic Research Association