I heard an interesting tale during my Riksbank visit, from Karolina Ekholm, Deputy Governor. She explained to me that in the immediate aftermath of the crisis, the Swedish debt management office were OVER-issuing government debt [ie selling more than they needed to finance the deficit] and using the proceeds to finance the acquisition of riskier, private sector assets. So they were doing negative QE. If you accept the line of argument pushed by Vissing-Jorgensen and Krishnamurthy, and also Caballero and Farhi, that there is a special demand for safe assets with duration, then this is just what the authorities should be doing at times of heightened financial stress and low risk tolerance. Central banks commonly use the event study analyses showing that QE lowered yields (raised prices) on government bonds as evidence that what they were doing was a success. But, on the contrary, this impact on yields could measure not the benefit, but the cost imposed by starving the economy of safe assets and of foregoing the benefits of the better, Swedish variety.’
-
Recent Posts
Recent Comments
Simon Price on Should Mervyn recuse himself f… gardinerams on New piece in Prospect on vacci… Dipper on How a Brexit transition end an… theuxbridgegraduate on Fiscal rules have been rightly… Christine Mcconnell on New Statesman Post on that Cum… Archives
- October 2021
- February 2021
- January 2021
- October 2020
- July 2020
- April 2020
- March 2020
- February 2020
- August 2019
- June 2019
- May 2019
- January 2019
- December 2018
- October 2018
- September 2018
- August 2018
- July 2018
- June 2018
- May 2018
- April 2018
- March 2018
- February 2018
- January 2018
- December 2017
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- June 2017
- May 2017
- April 2017
- March 2017
- February 2017
- January 2017
- December 2016
- November 2016
- October 2016
- September 2016
- August 2016
- July 2016
- June 2016
- May 2016
- April 2016
- March 2016
- February 2016
- January 2016
- December 2015
- November 2015
- October 2015
- September 2015
- August 2015
- July 2015
- June 2015
- May 2015
- April 2015
- March 2015
- February 2015
- January 2015
- December 2014
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- March 2014
- February 2014
- January 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
The above Swedish policy sounds to me like a subsidy of riskier investments. I don’t like the sound of that.
And I’m not persuaded by “the economy needs safe assets” argument. Any chance of your expanding on the above arguments?
Two wrongs often make, if not a right, then something better than it would be.
Thanks. It’s not great that the public sector buys these risky assets. And it is a subsidy of sorts. But two wrongs can make, if not a right, then something better. The motivation is that the cost of finance has risen inefficiently high because of market failure in some form of intermediation. This inefficiently low tolerence for risk can be compensated for by the public sector stepping in temporarily. The argument about the economy needing safe assets is very eloquently made by Caballero in several of his papers, so you should go there for the best explanation of it. Its essence is that when risk tolerance falls, demand for safe assets rises. If there is no more room to stuff assets under the mattrass, then someone needs to provide more mattrasses!