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Constrained discretion in Sweden

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  • Creel, Jérôme
  • Hubert, Paul

Abstract

We study whether the institutional adoption of inflation targeting (IT) has constituted both a policy and a macroeconomic switch in Sweden using the nonlinear MSVAR technique. We assess the relative weight put on inflation in the monetary reaction function and the capacity of IT to reduce macroeconomic uncertainty. We show that IT has constituted a policy switch to a lower focus on inflation, in contrast with the usual argument that has been put forth by IT opponents. Moreover, IT adoption is shown to have reduced uncertainty, through lower inflation and output variabilities simultaneously. Last, counterfactuals suggest IT provides higher monetary policy leeway.

Suggested Citation

  • Creel, Jérôme & Hubert, Paul, 2012. "Constrained discretion in Sweden," Research in Economics, Elsevier, vol. 66(1), pages 33-44.
    • Handle: RePEc:eee:reecon:v:66:y:2012:i:1:p:33-44
    DOI: 10.1016/j.rie.2011.08.002
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    1. Etienne Farvaque & Piotr Stanek & Stéphane Vigeant, 2014. "On the Performance of Monetary Policy Committees," Kyklos, Wiley Blackwell, vol. 67(2), pages 177-203, May.

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