Was Riksbank monetary policy in 1930s innovative?

Riksbank is seen as the first bank to start price level targeting during great depression. This was a precursor to inflation targeting  and is often cited as an example for central banks taking up price level targeting. This along with several other novel initiatives makes it an innovative central bank.

This paper by Alexander Rathke, Tobias Straumann and Ulrich Woitek says Riksbank mon pol in 1930s was not really innovative. For all that acclaim it has got, it is just overvalued. IN reality all they were doing is keeping its exchange rate undervalued so that exports remain competitive and economy can grow. As a result Sweden recovered much faster than others but it was not because of innovative policy but beggar thy neighbor policies:

This paper reconsiders the role of monetary policy in Sweden’s strong recovery from the Great Depression. The Riksbank in the 1930s is sometimes seen as an example of a central bank that was relatively innovative in terms of the conduct of monetary policy. To consider this analytically, we estimate a small-scale, structural general equilibrium model of a small open economy using Bayesian methods. We find that the model captures the key dynamics of the period surprisingly well. Importantly, our findings suggest that Sweden avoided the worst excesses of the depression by conducting conservative rather than innovative monetary policy. We find that, by keeping the Swedish krona undervalued to replenish foreign reserves, Sweden’s exchange rate policy unintentionally contributed to the Swedish growth miracle of the 1930s, avoiding a major slump in 1932 and enabling the country to benefit quickly from the eventual recovery of world demand. 

Such papers hit you hard as they undo some strong beliefs over the past. But that is beauty of economic history. It just has so many perspectives.

Some more insights. First Sweden recovery from the crisis:

It is well established that economies that abandoned the gold standard at an early stage of the Great Depression enjoyed a faster recovery (Temin, 1996; Eichengreen, 1992). Sweden was among those lucky countries. In late September 1931, a week after the fall of the British pound, the Swedish authorities abandoned the gold standard and let the krona depreciate. Denmark and Norway took similar steps and likewise enjoyed a similarly rapid recovery.

Sweden not only experienced a shorter crisis but also enjoyed a particularly strong industrial recovery after 1932. In 1937, Sweden’s index of industrial production was 152 (1929 = 100) while the comparable indices in Denmark, Norway, and the UK were 135, 130, and 130, respectively (Figure 1). The question is to what extent this growth miracle was because of economic policy.

What were the reasons?

In the following empirical analysis, we focus on the exchange rate policy and the effect of foreign demand, as suggested
by Kindleberger. However, the literature has also suggested other explanations, for which Soch (2000) provides a useful survey of the Swedish work. During the postwar decades, the heyday of Keynesian economics, the most  popular explanation highlighted fiscal policy. Supposedly, the Swedish Social Democrats, who came to power in 1932, revived the depressed Swedish economy by pursuing a model countercyclical policy based on the teachings of the younger generation of the Stockholm school (including Gunnar Myrdal and Bertil Ohlin). Actual figures, however, show that the fiscal deficit was too small to account for the recovery. 

This leaves us with just two other explanations discussed in the literature. The first, as advocated by Jonung (1984) and Fregert and Jonung (2004), focuses on monetary policy. By leaving the gold standard, the Riksbank was able to free itself from the deflationary train set in motion in 1930 and to implement a more expansionary monetary policy. In particular, this newly  ined freedom enabled the Riksbank to act as lender of last resort in the aftermath of the Kreuger crash of March 1932 and to avert a major banking crisis. Moreover, the Riksbank adopted a new monetary policy framework, so-called price level targeting, based on the seminal work of the eminent Swedish economist Knut Wicksell.

The second explanation is offered by Lundberg (1983). He highlights the importance of a weak krona throughout most of the 1930s and investigates why the undervaluation did not cause inflation at an earlier stage of the expansion. His answer is twofold. First, demand elasticity was rather high, i.e. foreign customers of Swedish products reacted strongly to the lowering of prices after the end of the gold standard in 1931. Second, the access to natural resources (wood, iron ore) was relatively cheap as domestic producers provided them

The authors test Lundberg claims and find it has merit over innovative policy. Apart from the model, there are some interesting comments from Riksbank then-chief which pretty much tells you what was happening. All this talk of innovative monetary policy is not true. Sample this:

Some American professors, e.g. Professor Irving Fisher, believe that it is an achievement by us in the Riksbank that prices have been fairly steady up to the middle of 1936. I have told Professor Fisher before and I am sorry to have to tell you now that what we have done is merely that we have carried out a fairly conservative central banking policy. In fact we have never tried to do anything directly with regard to prices.

The main lesson is that conservative central banking policy worked and not innovative mon pol:

In particular, monetary economists have cited the Swedish experiment with price level targeting as the prototype of modern inflation targeting. This present paper instead argues that this view overvalues the 1930s as a decade of policy innovation.  Before and after the collapse of the gold standard in 1931, the Riksbank was determined to have a stable currency, believing that it was a necessary condition for international trade. Further, the Riksbank fully rejected the idea of targeting the domestic price level, which implied a floating exchange rate. Moreover, in order to be more resilient in future currency crises, the Riksbank aimed at replenishing its foreign exchange reserves by fixing the exchange rate at an undervalued level. In other words, the strong recovery was the unintentional byproduct of conservative central banking policy.


Another version of great depression history being re-written. I have posted a few lately.

  • This one showed not all of Fed was not clueless during depression as suggested by Friedman and company. Atlanta Fed knew financial stability was important
  • It is ling felt that 1937-38 recession was caused by Fed doubling reserve requirement of banks. Calomiris showed banks maintained high reserves anyways. Douglas Irwin brings another insight saying sterlization of gold flows by Treasury  was the reason for the double dip in 1937-38 absolving blame on the Fed…
And now this different perspective on a non-US economy. Superb…



One Response to “Was Riksbank monetary policy in 1930s innovative?”

  1. Did the Keynesian revolution start in the 1930s? « Mostly Economics Says:

    […] just pointed a paper which shows Sweden did nothing of this sort. It was also just trying to devalue its […]

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