Karolina Ekholm argued for looser monetary policy for almost three years on the Swedish Riksbank’s board. Her perseverance, grounded in scholarly analysis of global trends, is now bearing fruit.
The world’s oldest central bank has reduced its benchmark interest rate four times since December 2011. Each time, Ekholm voted for deeper cuts or a lower rate outlook, saying policy makers should focus less on asset prices and more on promoting economic expansion and job creation to keep Sweden from importing the euro area’s recession. Her argument reverberates across central banks in a sluggish global economy.
“She’s been right about how the economy has developed, since the board eventually was forced to cut rates to boost growth and inflation,” said Par Magnusson, chief economist at Royal Bank of Scotland Plc in Stockholm. He was a student of Ekholm’s at Lund University. “The board would have been a poorer place without her.”
In her four years at the 345-year-old central bank, Ekholm, 48, has disagreed with the majority in every meeting since June 2010. She’s facing resistance from policy makers concerned they may be fueling an asset-price bubble, with Governor Stefan Ingves saying household credit growth may be prompting unsustainable increases in home prices.
Four of the six board members, led by Ingves, have voted in concert since 2010 for a tighter policy than Ekholm was advocating. The six-member board is evenly split between men and women.
“Given that there seems to be no inflation risk and that unemployment after all is higher than we think it needs to be in the long term, I don’t see any reason why we shouldn’t try to cut the jobless rate,” Ekholm, who is on leave from a professorship at Stockholm University, said in an interview.
An espresso machine sat on her windowsill as she spoke in her office, furnished in sleek, understated Scandinavian wood and light colors. She also served coffee in her office at Stockholm, leading students who gathered there to call it Cafe Ekholm, said Katariina Nilsson Hakkala, a researcher whose thesis Ekholm co-supervised. Charismatic and sociable, Ekholm would draw people in for discussions, Nilsson Hakkala said.
Balancing policy goals also weighs on other central banks. The Bank of England has tolerated three years of above-target inflation and European Central Bank President Mario Draghi has cut rates three times since joining the bank in 2011, pledging last July to do “whatever it takes” to protect the euro. In the U.S., the Federal Reserve is focusing on reducing the jobless rate after decades of emphasizing low inflation.
The Riksbank kept its seven-day repo rate at 1 percent on Feb. 12, with Ekholm advocating a cut to 0.75 percent and calling for lower rates through the first quarter of 2016.
Publicly airing her views on economic policy wasn’t something Ekholm set out to do. After resisting calls from her anthropologist mother to study sociology and abandoning plans to follow in her father’s footsteps to become a physician, she decided in favor of macroeconomics after being told it was the most difficult of the social sciences.
During her first year at Sweden’s Uppsala University, she “didn’t understand that much,” she said. Her decision to pursue a career in the field came when she took a course on cost-benefit analysis in 1987.
“That sounds incredibly nerdy because nobody thinks cost- benefit analysis is fun,” she said. To her it was interesting since she got to “apply theory to create the basis for pretty difficult decisions like infrastructure investments and investments to improve the environment.”
Ekholm originally planned to become a civil servant. Instead, she stayed in academia: as a researcher at the Research Institute of Industrial Economics between 1996 and 2000, a teacher at the Stockholm School of Economics until 2006 and an associate professor at Stockholm University. She received her professor title while at the Riksbank in 2010.
She taught while earning her degree, and informally mentored some of her economics students. Most, though not all, were women. Her own mentor, the late Johan Torstensson, who studied international trade, was a fellow Ph.D student. He was “an inspiring person with a passion for economics,” Ekholm said.
Ekholm is missed in the research world, where her departure “left a black hole,” according to Nilsson Hakkala, who called Ekholm a role model.
“Her courage has taught me a lot,” Nilsson Hakkala said. “I’ve learned to not fear commenting on the research of economists more senior than myself. I’ve always thought: what would Karolina have done?”
In the acknowledgments to her thesis, Nilsson Hakkala said: “I always had to be prepared for criticism from Karolina. However, the criticism was never unjustified and I am very grateful for it.”
“She introduced me the art of solving general equilibrium models numerically and suddenly I found it very enjoyable to run GAMS-simulations late at night. It has been very stimulating to work with Karolina.”
In 2007, Ekholm was asked to sit on the Swedish Fiscal Policy Council, which assesses the government’s tax and spending issues. Ekholm’s work there gave her a policy background, opening the door to joining the central-bank board, she said.
“I think that Lars Calmfors, who was chairman of the council, thought that I seemed to be a generally sensible person,” she said. The main take-away from her academic career has been “that in order to make well-informed decisions, you have to carry out proper analyses, which involves both thinking through how things work in the abstract as well as looking systematically at facts.”
Ekholm came to the Riksbank in March 2009 at the height of the financial crisis. After concurring with the board on monetary policy through her first year, Ekholm began to advocate lower rates than the majority wanted.
“She has a very solid background in international economy, which is definitely a benefit in today’s increasingly globalized world,” said Rikard Forslid, an economics professor at Stockholm University. “That’s good for the Riksbank, which has often had more of a domestic focus.”
Ekholm also is a long-distance runner who “likes to hang out with friends,” he said.
When policy makers embarked on a cycle of rate increases in June 2010, Ekholm argued for holding rates lower to ward off a threat to growth from the euro-area debt crisis, according to the minutes of the meeting.
The central bank’s staff provides forecasts on economic developments ahead of each rate meeting, and board members can order up additional research. Ekholm says she deduces the policy consequences from the staff’s forecast, then tends to “ask for simulation results” for other policy options, which also are shared with the board.
Ekholm’s case has been supported by fellow board member and former Princeton University Professor Lars E.O. Svensson, 65, who criticizes the central bank for having kept headline inflation an average 0.6 percentage point below the bank’s 2 percent target since 1997. This has pushed unemployment 0.8 percentage point higher than necessary, without any large effect on household debt, Svensson says. He spoke out for even bigger rate cuts than Ekholm wanted this month.
The jobless rate will climb to an average 8.1 percent this year from 7.7 percent in 2012, the central bank predicts. That compares with last month’s 7.9 percent in the U.S. and 6.8 percent in Germany, the euro area’s biggest member.
A more expansionary monetary policy would bring inflation closer to the 2 percent target and reduce unemployment, Ekholm said on Feb. 12, according to minutes of the meeting published today.
“I have worked with her for many years and have also known her to be stubborn,” said Karen Helene Ulltveit-Moe, an economics professor at the University of Oslo, who is close friends with Ekholm. Together they’ve set up a research network for Nordic economists specializing in international economics, which organizes yearly workshops.
Ekholm gained her doctorate at Lund University with a thesis titled “Multinational Production and Trade in Technological Knowledge.” It was an examination of, among other things, how global companies choose locations for their overseas operations and trade in specialized services. Ekholm says there was very little previous research on multinational businesses to build on.
“She’s more analytically and model-driven and has a more academic approach to things than a lot of the board members, who use more of a gut feeling when setting rates,” said Forslid, who has known Ekholm since graduate school in Lund.
Ekholm said she’s impressed with Fed Vice Chairman Janet Yellen, who has disagreed with colleagues taking the view that accommodative policy can’t help create jobs. She’s also argued the Fed should accept somewhat more inflation to do so.
In a Feb. 12 speech, Yellen signaled stimulus may outlast the Fed’s bond purchases, saying the central bank could hold the federal funds rate near zero as long as the inflation rate isn’t forecast to rise to more than 2.5 percent in the near term and unemployment exceeds 6.5 percent.
Higher rates in Sweden than abroad are putting pressure on the currency. The ECB this month kept its benchmark at 0.75 percent, and the Fed’s target is zero percent to 0.25 percent. The krona has strengthened 7.6 percent against the euro and 12 percent against the dollar since it began rising in May, eroding the competitiveness of Sweden’s export sector.
“I’m not that worried about the strengthening krona so far since we still have a repo rate at 1 percent, so we have quite a bit of room for further cuts,” Ekholm said. “The natural thing to do if the exchange rate should change in a way that risks deflation is to use the monetary-policy rate to try to lift inflation toward the target.”
A drive in Sweden to get women into high-powered jobs has helped Ekholm climb the career ladder, she said.
“I have been asked to take part in things that I perhaps wouldn’t have been asked had I not been a woman, if I had been a man with the same merits,” she said, adding that the invitation to join the fiscal policy council was probably one of those, since her expertise wasn’t in fiscal policy or the labor market.
The process of moving more women into top jobs in Sweden still is “going very, very slowly,” partly because women tend to prioritize kids and family over careers, she said. Ekholm isn’t married and has no children, a fact she says has made it easier to focus on work.
One in five professors in Sweden is female, an increase from about 5 percent in 1984, a report by the Swedish National Agency for Higher Education found in 2011. In the U.S., about 29 percent of professorships were held by women in fall 2011, according to data from the Department of Education.
“I thought when I was working on my Ph.D. that I would be part of a generation of women that would become associate professors and professors and so on,” she said. “In reality, many dropped out along the way.”
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