A role model for the conduct of fiscal policy? Experiences from Sweden

Sweden was hit by a severe macroeconomic crisis in the early 1990s. GDP fell for three consecutive years in 1991–1993, unemployment increased by 9 percentage points, banks had to be nationalized, and public budget deficits exceeded 10 percent of GDP. The recovery was however quick. GDP growth was ar...

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Bibliographic Details
Published in:Journal of international money and finance 2013-04, Vol.34, p.177-197
Main Author: Flodén, Martin
Format: Article
Language:English
Subjects:
Banking crisis
Budget deficit
Budget deficits
Deficit financing
Economic crisis
Economic recovery
Exchange rates
Exports
Fiscal consolidation
Fiscal policy
Fiscal rules
Fixed exchange rates
Foreign exchange rates
GDP
Gross Domestic Product
Macroeconomic crisis
Public budgeting
Public debt
Public finance
Structural reforms
Studies
Sweden
Western Europe
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Summary:Sweden was hit by a severe macroeconomic crisis in the early 1990s. GDP fell for three consecutive years in 1991–1993, unemployment increased by 9 percentage points, banks had to be nationalized, and public budget deficits exceeded 10 percent of GDP. The recovery was however quick. GDP growth was around four percent in 1994–1995, and budget deficits had been eliminated by 1998. Growth remained high in the subsequent decade, and the government debt ratio was reduced by almost 50 percent of GDP. This paper describes and analyzes the Swedish crisis and the policy measures implemented in response to the crisis. Policy measures include abandoning the fixed exchange rate, fiscal austerity, a new stricter fiscal framework, and several structural reforms in the 1990s. These policies were appropriate for handling the Swedish crisis, but the Swedish experiences have limited applicability for the current debt crisis, in particular because currency depreciation in combination with strong growth on export markets was a key ingredient in the Swedish recovery. Implementing fiscal austerity would have been more complicated absent this export-led growth. Moreover, the new fiscal framework has most likely contributed to strengthening public finances, but I demonstrate that budget surpluses and high GDP growth only explain around a third of the reduction in the public debt ratio after 1997.
ISSN:0261-5606
1873-0639
1873-0639
DOI:10.1016/j.jimonfin.2012.11.010