Monday, January 19, 2009

Sweden, Norway and a request for some decent macroeconomic models

Warning – non-stock post – mostly macroeconomics problems.

There is a debate online about what the Swedes did or did not do to bail out their banking system.  See Kevin Drum here and Steve Waldman here.  Having long followed the Scandinavian banks (and once having spoken for 2% ownership of Nordea – the former State Bank) I can confirm that Steve Waldman is closer to the truth.

However the best example is not Sweden – it is Norway – and a full history in English of their banking crisis can be found here – compiled by Norges Bank after their crisis.  

It is the single most useful volume anywhere on the Scandinavian crisis – even though it limits itself to Norway.  I gave a summary here.  

Can people read the Norwegian document before they start professing expertise on this stuff.  Please.  

I only point it out to raise the quality of debate, but more importantly I have an intellectual puzzle.

A lesson from the Scandinavian banking crisis was that you did not want to have a fixed currency.  To this day only Finland has pegged to the Euro – and Finland does not own any of its banks.  Norway, Sweden, Denmark and Iceland had their own currencies – and it has always been my belief – following the Norwegian experience – that if you want to have a banking system and avoid financial crises you better have your own currency.  The Scandinavian central banks would agree with that statement.  Indeed a good part of the problem of the Scandy banks this time is that they lend in the Baltic States – and those are small states with fixed currencies.

This time countries with their own floating currencies are having problems – notably Iceland.  Willem Buiter is pamphleting about the UK joining the pound as a way of avoiding becoming Reykjavik on Thames.  However we have Reykjavik on Liffey (Dublin) and they did everything in Euro.  

My guess is that Buiter is plain wrong – and Norway provides his counter-example.  Moreover the Iceland example that Buiter points to is misleading because the Icelandic banks did a lot of their borrowing in GBP and Euro.  

I find it odd that I am having academic debates with Willem Buiter about macroeconomics.  He might be the most famous macroeconomist in Europe and I did my last macroeconomics course twenty years ago.  Can someone help me out here with a simple model? 



Anonymous said...

I think your logical chain breaks down. Norway and Sweden both had financial crises, despite having their own currency.

What having your own currency may do is prevent other people's crises becoming yours.

Anonymous said...

once having spoked for 2% ownership


Willem Buiter is pamphleting about the UK joining the pound


Anonymous said...

My impression is that formal economic models tend not to be very useful in dealing with modern financial markets, which is one reason why 'smart' academics like Krugman, de Long and Buiter can be at complete loggerheads over how to deal with the crisis. However, former RBA Governor Ian Macfarlane once made reference to an informal model - he called it the Australian model - which emphasised the importance of a floating exchange rate, and seems very consistent with your point. See

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