Vincent Reinhart Resident Scholar April 18, 2011 The Road to Stable Public Finances The Importance of Being Prudent--Sweden's Fiscal Approach 1

Vincent Reinhart Resident Scholar April 18, 2011 Getting to know a Swedish Model 2

The fiscal position of AEs and EMEs in 2009… 3 AEs EMEs IMF, Fiscal Monitor (4/11)

…but the IMF expects the situation to improve 4 G-20 AEs G-20 EMEs IMF, Fiscal Monitor (4/11)

Much of the improvement is cyclical in the aggregate … 5 G-20 AEs G-20 EMEs IMF, Fiscal Monitor (4/11)

…and across countries from 2009 to IMF, Fiscal Monitor (4/11)

As also reflected in the composition of deficit reduction from 2009 to 2011… 7 IMF, Fiscal Monitor (4/11)

We know from R&R that economies grow more slowly after a severe financial crisis… Real Growth ofUnemploy-Change inhouse Real GDPmentequityprices per capitaratepricesT-1=100 percent level T-10 to T T-5 to T T T (Crisis) T T+2 to T T+6 to T Source: Carmen Reinhart and Vincent Reinhart, "After the Fall," Jackson Hole Symposium, 8/2010 8

…and from R&R that economies encumbered by debt grow more slowly 9

Thus, the real growth imbalance between AEs and EMEs will stay wide… 10

With this growth imbalance, Slow-growing AEs willFast-growing EMEs will 11 Keep monetary policy accommodative Seek to enlarge the market for government debt Continue to import a U.S. monetary policy that is inappropriate for domestic conditions Both will be more favorably inclined to placing restrictions on finance

Vincent Reinhart Resident Scholar 1150 Seventeenth Street, N.W., Washington DC website: Phone: (202)