We should have all copied the Swedish debt management office

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.’

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