MacroScope

The Federal Reserve’s long-quiet doves are becoming increasingly louder about championing more aggressive forms of monetary easing, including possibly setting employment and inflation targets and/or engaging in another round of bond purchases. Most prominent among these have been Charles Evans, the Chicago Fed president who openly favors more transparent policy guidance and Eric Rosengren, who told CNBC on Wednesday a third round of monetary easing could be in store:

If the economy were to be weaker than most people are forecasting, that would certainly be cause for doing additional monetary policy.

Rosengren also said he favors more explicit policy targets, which could take a rather controversial form known as price-level targeting. Under this arrangement, the Fed would temporarily shoot for higher inflation to make up for the almost deflationary readings seen late last year, in an effort to boost investment, spending and hiring.

Looking for precedents, Goldman Sachs offers up the interesting example of Sweden — in the 1930s. Citing the findings of Claes Berg and Lars Jonung in a 1999 edition of the Journal of Monetary Economics, Goldman economists determine that the program was successful because it was relatively simple and also temporary:

Sweden’s experience highlights a number of issues involved in adopting a price level targeting framework.

Definition of price stability: The authorities decided to stabilize the price level at the price level of the third quarter of 1931, to take place at once. Despite various requests, policymakers decided not to attempt to return the price level to pre-crisis levels and did not allow for a drift in the price level over time. Also, the Riksbank was not given any other goals, such as output or employment stabilization.

Temporary vs. permanent: The introduction of the price level target was intended and announced as a temporary step by the government. Once the conditions were at hand, a return to gold was planned for.

Choice of price index: The Riksbank primarily targeted the CPI, and started publishing consumer prices on a weekly basis to allow for better monitoring. However, it did not tie its policy solely to stabilizing consumer prices and announced that “other price indices besides the Riksbank’s own index of consumer prices will also be taken into consideration.” For example, the Riksbank also paid attention to wholesale prices.

Treatment of special factors: Policymakers stressed the need to disregard temporary factors like indirect taxes, customs duties and seasonal effects influencing inflation.

Implementation: Changes in the discount rate and operations in the foreign exchange market were the most important instruments. Immediately after leaving the gold standard, the Riksbank did not intervene in the foreign exchange market and allowed the krona to float freely. But from July 1933 the Riksbank established a successful peg of the krona to the British pound that lasted until World War II.