Lars Jonung presented a framework for analyzing the interaction between policy advice and economic crises in Sweden from 1970 to 2025. He argues that crises drive a learning process where lessons from previous crises shape the policy response and advice. However, this leads to backward-looking, short-term lessons that risk instability if a new crisis differs. The learning process may contribute to future imbalances and a predicted crisis around 2020. Policy-makers should improve collective memory to avoid repeating past mistakes.

1. Policy advice and economic crises. How do they interact?
The case of Sweden 1970-2025
ECONOMICS AND POLICY ADVICE – A FAREWELL SEMINAR FOR MR. ANTTI SUVANTO
Bank of Finland, Helsinki, 11 April 2016.
Lars Jonung, Knut Wicksell Centre, Ekonomihögskolan, Lund University, Lund

2. It is a great honour for me to take part in
this farewell seminar for Antti Suvanto

3. For me: reunion seminar
A long history of contacts with Finnish economists:
in the 1970s Jouko Paunio and Pentti Kouri,
in the 1980s Sixten Korkman, Johnny Åkerholm, H C Blomqvist, Antti
Suvanto, Seppo Honkapohja, et al.,
in the 1990s Pentti Vartia and I got a grant, Jaakko Kiander, Vesa
Vihriälä, Mika Tujula, and
in the 00s I went to DG ECFIN in Brussels: Sixten Korkman, Anne
Brunila and Heikki Oksanen and Antti.
And in Lund/Mölle I have met some of you.

4. Policy advice and economic crises. How do they interact?
The case of Sweden 1970-2025
My lecture is focused on stabilization policies (macro):
a) How policy advisors (advice) are influenced by
economic crises and
b) How economic crises are influenced by policy
advisors (advice)
4

5. Policy advice and economic crises. How do they interact?
The case of Sweden 1970-2025
A typo – a printing error – in my title?
A policy advisor should be able to look back as well as
ahead and:
a. forecast the next economic crisis and
b. forecast the policy response to the next crisis and
c. forecast the policy advice emerging after the next
future crisis
5

6. Why look at Sweden?
Sweden is well suited for a study the interaction of policy advice (policy
advisors) and policy outcomes:
1. The Swedish political system has allowed the government to directly
control the instruments of fiscal and monetary policies, and in particular to
influence the central bank until it became independent.
2. The prevalent Keynesian (Stockholm School) traditions and views have
given the government many instruments and much discretion to use when
framing policies. Strong public belief in the power of economic policies.
3. The Swedish tradition of openness and debate concerning public affairs
has induced policy makers to publish their memoirs and views. This
literature represents an extremely fruitful source for research. Here policy
makers reveal, sometimes surprisingly frankly, their thinking and their
views on the proper conduct of fiscal and monetary policies.

7. The best book by a Swedish minister of finance ..

8. Back cover text:
A frank, humorous, informed and unsentimental account – just like Feldt himself.
..
Baksidestexten på Feldts memoarer:
Kjell-Olof Feldt, Sveriges finansminister under större delen av 1980-
talet, avgick under dramatiska omständigheter i februari 1990. Nu skriver
han om sin tid i regeringen. Hans bok liknar ingen annan politisk memoar.
Den är frank, humoristisk, kunnig och osentimental som Feldt själv.

9. The head of the Riksbank explains a 500 % overnite rate
…

10. The prime minister explains what he would have
done if he just knew…

11. The minister of taxes explains how he saved
Sweden …

12. The prime minister explains how he cleaned up
the mess …

13. Can we trust these memoirs?
We do not need to trust the memoirs.
We have the record of changes in the instruments, the goals
and the institutions for policy-making.
It is the thinking of policy makers that we get from the memoirs
– or more correctly how they think they thought
13

14. Why look at Sweden?
Sweden is unique
Through a series of five economic crisis 1970-2015, Sweden
went from extreme Keynesianism to extreme rule-bounded anti-
Keynesianism in less than 50 years.
From unrestricted fiscal and monetary policies to restricted
polices.
14

15. Analytical framework
Which is the proper one?
How should we analyze this pattern – as social
scientists – as economists?
It is learning process involving two actors:
1. Policy-advisors (the economics profession)
2. Policy-makers (the government and the central
bank)
15

16. Analytical framework
Which is the proper one?
It is learning process – a collective learning process.
How do you model it?
Econometrics?
Rational expectations?
Model with ”representative agents” with
eternal lifespans?
DSGE-approach?
Warning for the next picture. Boxes and arrows!
16

17. Figure 1. The policy learning process -
an outline.
Lessons from
previous policies.
Macroeconomic
disturbance ("shock")
affects the
economy.
The policy response is
based on current policy l
lessons learned.
The effects of the policy
response appear
with some time lag.
New lessons are
learned when evaluating
the effects of the policy.
New macroeconomic
disturbance.
New policy response. Effects of
the policy response.
New
alessons.
Macroeconomic Policy response The effects of Policy learning
disturbance the policy (Lessons)
(1) (2) (3) (4)

18. Macroeconomic
disturbance
(1)
Policy
reaction
(2)
Policy
effects
(3)
Policy
learning
(4)
1969-70:
Outflow of foreign reserves.
Deteriorating current account
balance. Tendency towards
inflation.
1970-72:
Policy of restraint. Contractive
fiscal and monetary policy.
1971-73:
Rising unemployment.
”The lost years.”
Lessons from the Bretton Woods
system: External balance and a fixed exchange
rate.
Lessons of “the lost years”:
Expansive Keynesian fiscal policy suitable to
maintain full employment.
1973-74:
OPEC I.
Oil price shock.
Supply disturbance.
1974-76:
Policy of “bridging over”.
Expansion via fiscal policy.
1977-78:
”Costs-crisis.” Growing budget
deficit and crisis in different
industries.
Lessons from OPEC I:
Expansive fiscal policy creates imbalances.
Devaluations “work”.
Devalveringar ”fungerar”.
1979-80:
OPEC II.
Oil price shock.
Supply disturbance.
1980-82:
Fiscal austerity package.
Devaluation in 1981.
Offensive “super-devaluation”
in 1982.
1983-85:
Strong inflationary impulse.
Rising profits.
Lessons from OPEC II:
Rule-bound policy based on a fixed exchange
rate. Hard currency policy.
Episode 1
Episode 2
Episode 3

19. Macroeconomic
disturbance
(1)
Policy
reaction
(2)
Policy
effects
(3)
Policy
learning
(4)
1986-90:
Boom due to credit
expansion. Overheating. Real
interest rate shock. Financial
crisis.
1990-92:
Strong defense of the fixed
krona rate. Government
support to the financial
system.
1991-95:
Rapidly increasing unemployment
and budget deficits. Deflation.
Floating krona rate.
Lessons of the 1990s:
Institutional reforms, independent Riksbank, a
stricter budget process. Floating krona or totally
fixed rate.
2008-10:
Global financial crisis. Sharp
fall in exports. Threats against
the banking system.
2008-10:
Expansionary monetary
policy. Tight fiscal policy.
Government support to the
banking system.
2011-13:
Rapid recovery.
Strong public finances.
Persistent unemployment.
Lessons from the global financial crisis:
New regulation and supervision of the banking
system. Macroprudential regulation.
The future:
Next disturbance or crisis of
unknown nature.
Tight fiscal policy. Expansionary
monetary policy.
Unknown outcome.
New lessons of tomorrow’s crisis.
Episode 4
Episode 5
Episode 6

20. The policy learning process 1970-2015
Major conclusions.
1 Crises are the driving force behind the
learning process
Economic crises which forced the policy-advisors
and policy-makers to evaluate different policy
options and thus to search for lessons from the
past.

21. The policy learning process 1970-2015
2. The sources of information for the learning
process
The main source of information was the
interpretation of the most recent previous domestic
economic crisis and its policy outcome.

22. The policy learning process 1970-2015
3. The character of the learning process
a) Learning was built on a comparison between
the current crisis and the previous crisis. Learning
was therefore backward-looking and of a short-
run character: it excluded episodes, that is,
information from events further back in time.
b) Learning was primarily of a negative
character: the lesson was to avoid repeating what
was perceived as policy mistakes during the
previous crisis (”error-learning”).

23. The policy learning process 1970-2015
4. The macroeconomic consequences of the
learning process
• Learning determined the policy response and thus
influenced the path of the macro-economy. Two cases
should be distinguished:
• a) When the new crisis was similar to the old crisis, the
“mistakes” from the previous crisis were avoided.
• b) When the new crisis differed significantly from the old
crisis, the learning process risked creating instability. In this
case, policy-makers met the new crisis with the support of
misleading lessons. The learning process then became a
potential source of instability.

24. The policy learning process 1970-2015
5. Did policy-makers and policy-advisors learn
to learn?
It is difficult for them to learn to learn. They have
a short time span in power.
Then they are replaced – by elections or by
retirement.

25. The policy learning process 1970-2015
How can policy-advisor play a more
constructive role in preventing the next crisis?
Improve the collective memory:
1. The role of the university?
2. Fiscal councils? Central banks?
3. Employ old and retired professors/policy-
advisors (70+) in the ministry of finance/central
bank to sit in the coffee room and talk with the
young civil servants fresh out of university?…

26. Now to the next crises
The learning process is a never-ending story
Learning is a continuous process.
It never ends – unless we have a crisis-free future.
We know for sure that there will be new crisis.
Let us look upon the lessons we thought we learnt from the past
crisis. The Lehman crash – the Great Recession – the global
financial crisis of 2008

27. Lessons from the most recent crisis
2008

28. Now to the next crises…
The present majority view:
Inflation targeting should be the goal of the central
bank. And during a crisis the central bank should
provide ample liquidity.
Macroprudential regulation should restrict the
growth of credit.
Will these lessons from the global financial crisis of
2008 be the correct one?

29. Now to the next crises…
My forecast for Sweden:
These policy lessons are contributing to
serious and growing financial imbalances
in Sweden (and world-wide)
Thus paving the way for the next crisis in
2020 +/- 5 years.

30. Credit growth in Sweden 1963-2014
50
70
90
110
130
150
170
190
210
230
250
1963K1
1966K1
1969K1
1972K1
1975K1
1978K1
1981K1
1984K1
1987K1
1990K1
1993K1
1996K1
1999K1
2002K1
2005K1
2008K1
2011K1
2014K1
%
Totala krediter (% BNP) Hushållens krediter (% disponibel inkomst)

31. Real house prices 1995-2014
50
100
150
200
250
300
350
1995K1
1995K4
1996K3
1997K2
1998K1
1998K4
1999K3
2000K2
2001K1
2001K4
2002K3
2003K2
2004K1
2004K4
2005K3
2006K2
2007K1
2007K4
2008K3
2009K2
2010K1
2010K4
2011K3
2012K2
2013K1
2013K4
2014K3
Index100=1995
Sverige Irland Tyskland Storbritannien USA

32. Real house prices in the Nordics
1970-2015

33. Will this time be different?
My forecast: No, it will not be different 2016-
2025.
There will be a ”corrrection” in the future.

34. The policy lessons after the next crisis ?
The policy lesson from the next crisis?
a. Control debt/credit?
b. Capital controls?
c. Freak advice?
We have tried demand side policies in various
forms for 1970-2025.
Why not supply side policies?

35. The future
Will my forecast today turn out to be the correct
one?
The future will tell!
Welcome back to a new seminar (farewell to old
pre-crisis policy advice) after the next deep crisis!

36. Policy advice and economic crises. How do they interact?
The case of Sweden 1970-2025
ECONOMICS AND POLICY ADVICE – A FAREWELL SEMINAR FOR ANTTI SUVANTO
Bank of Finland, Helsinki, 11 April 2016.
Lars Jonung, Knut Wicksell Centre, Ekonomihögskolan, Lund University, Lund

37. POLICY LEARNING
Looking ahead through the Rear-View Mirror
Published in 1999 in Swedish
http://www.regeringen.se/content/1/c4/37/48/5ea1caf7.pdf