THE SWEDISH MARKET PRICE APPROACH TO MONETARY POLICY OF THE 1930s
ROBERT E. KELEHER
Recently, some analysts have prescribed the combined use of certain market prices as a useful strategy for monetary policy. In light of problems with conventional (time-series) empirical tests of the approach, one may consider an alternative "test" of this strategy: examining historical episodes when the strategy was employed. The Swedish experience during the early 1930s provides one such example. This experience, fathered by Knut Wicksell, is an example of a fiat money-flexible exchange rate regime in which (i) a short-term interest rate was used as a policy instrument, (ii) market prices were used as policy guides or intermediate indicators, and (Hi) price stability was the explicitly voiced goal of monetary policy. Monetary or reserve aggregates were neither proposed nor employed as policy guides or targets in pursuing this price stabilization objective. This Swedish experience is important since it provides a rare example of a market price approach to monetary policy. This paper demonstrates that the approach worked remarkably well. Copyright 1991 Western Economic Association International.
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