Finally, I am posting a real blog entry. My very first. So, what should I write about? As you all know, I regularly follow a great number of topics, such as the Chinese slowdown and crisis risk, the U.S. Presidential campaign, Brexit, the Riksbank's use of negative interest rates, mandatory retirement rules all across Europe, and so on. For now, however, let me focus just on my pet peeve since at least 2014: Norges Bank's reluctance to ease.
Their reluctance mainly comes from fears of financial stability as house prices keep rising and households increase their borrowing. I worry about those things, too. But I do not think interest rates are the best instrument for trying to control them. For one thing, I don't think they are very effective in this regard. For another, using interest rates for this purpose amounts to keeping the economy deliberately below full employment. That might be worth it if the benefit in terms of financial stability were substantial. Research almost unanimously concludes that it is not, however. In fact, Lars Svensson, previous Riksbank Deputy Governor, argues in a recent paper that keeping rate high for this reason is counterproductive even from the point of view of financial stability. The reason is that, if a bubble indeed bursts, its effects will be even worse if it starts from an economy below full employment. I'm sure this debate will go on. But I do note that Norges Bank now seems to be left alone with this attitude among all the advanced-country central banks, now that the Riksbank has reversed its skepticism.
So, why should the Norges Bank ease? Simply because unemployment is too high, even if it does't keep rising. The economy operates below full capacity. Maybe the corner has been turned; but the output gap is still negative, and substantially so. It is true that inflation is currently running above target. But that will prove temporary as the NOK weakening has had its full effects.
Finally, Norway cannot expect to be left alone as a high-interest country in a world of near-zero interest rates. Low rates are the new normal, as is slow global growth. Come on, guys at the Norges Bank board. Do us a favor and ease again on Sep 22.