3 years ago Sweden was mostly considered as the primary example in how to handle the international crisis. The country’s exports were significantly impacted by declining global trade but recuperated; its well-monitored banks overcame the financial storm; its solid social insurance programs assisted consumer demand; and as opposed to much of Europe, it still held on to it own currency, which provided much-needed flexibility.

By mid-2010 output was surging, and unemployment was falling fast. Sweden, declared The Washington Post, was “the rock star of the recovery.” Then the sadomonetarists moved in.

The story so far:

In 2010 Sweden’s economy was doing much better than those of most other advanced countries. But unemployment was still high, and inflation was low. Nonetheless, the Riksbank — Sweden’s equivalent of the Federal Reserve — decided to start raising interest rates. There was some dissent within the Riksbank over this decision. Lars Svensson, a deputy governor at the time — and a former Princeton colleague of mine — vociferously opposed the rate hikes. Mr. Svensson, one of the world’s leading experts on Japanese-style deflationary traps, warned that raising interest rates in a still-depressed economy put Sweden at risk of a similar outcome. But he found himself isolated, and left the Riksbank in 2013.

Sure enough, Swedish unemployment stopped falling soon after the rate hikes began. Deflation took a little longer, but it eventually arrived. The rock star of the recovery has turned itself into Japan.

Source: http://www.nytimes.com/2014/04/21/opinion/krugman-sweden-turns-japanese.html