Per Åsberg Sommar: Historical data from the Riksbank is vital for macroeconomic theories, Sweden’s shift to a 2% inflation target, and the impact of larger economies on small open economies | Macro Musings

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Historical data from the Riksbank is crucial for testing macroeconomic theories. The Riksbank formally adopted a 2% inflation target in 1995 after allowing the Swedish krona to float. Flexible inflation targets can accommodate supply shocks while maintaining medium-term goals.

Key Takeaways

Historical data from the Riksbank is crucial for testing macroeconomic theories.
The Riksbank formally adopted a 2% inflation target in 1995 after allowing the Swedish krona to float.
Flexible inflation targets can accommodate supply shocks while maintaining medium-term goals.
Small open economies are significantly influenced by the monetary policies of larger economies.
Central banks use corridor systems to stabilize short-term interest rates.
The Riksbank employs certificates of deposits to manage liquidity, differing from traditional reserves.
Evaluating central bank effectiveness requires focusing on reserves rather than balance sheet size.
The Riksbank balances reserves based on demand and pricing of monetary policy instruments.
Quantitative easing by the Riksbank since 2015 has led to a significant liquidity surplus.
The Riksbank aims to maintain a scarce reserve system to ensure banks drive liquidity growth.
The Riksbank’s operational framework involves balancing liquidity to make the system scarce.
The Riksbank’s certificates of deposits are tradable securities, unlike account-based money reserves.
The Riksbank’s approach to liquidity management emphasizes the importance of reserve levels.

Guest intro

Per Åsberg Sommar is a senior advisor in the markets department at Sveriges Riksbank, the Swedish central bank. He previously served as Head of the Market Strategy Division in the same department. He co-authored key research on the Riksbank’s monetary policy implementation and operational framework reforms.

The importance of historical data in macroeconomic research

The Riksbank’s historical data is invaluable for testing macroeconomic theories.
My friend Josh Shenrikson and I know others have used that data to test macroeconomic theories for example the long run neutrality of money

— Per Åsberg Sommar
Historical data provides practical applications for contemporary economic analysis.
The significance of historical data lies in its ability to validate and refine macroeconomic theories.
Researchers utilize historical data to understand long-term economic trends and patterns.
The Riksbank’s data is a critical resource for economists studying monetary policy impacts.
Historical data allows for the examination of economic phenomena over extended periods.
The Riksbank’s archives serve as a foundation for empirical research in economics.

Sweden’s shift to inflation targeting

The Riksbank adopted a formal inflation target of 2% in 1995 after allowing the Swedish krona to float.
After letting the Swedish krona float the Riksbank adopted formally the inflation target in 1995

— Per Åsberg Sommar
Initially, the inflation target included an interval of 2% plus or minus 1%, abolished in 2010.
The formal adoption of inflation targeting marked a significant shift in Sweden’s monetary policy.
Inflation targeting aims to provide a stable economic environment by controlling price levels.
The Riksbank’s decision reflects a broader global trend towards inflation targeting in central banking.
The 2% target is designed to anchor inflation expectations and maintain economic stability.
The evolution of inflation targeting in Sweden highlights the adaptability of monetary policy frameworks.

Flexibility in inflation targeting

A flexible inflation target can accommodate supply shocks while maintaining a medium-term goal.
The argument for a band is you have supply shock so you want some flexibility

— Per Åsberg Sommar
Flexibility in inflation targeting allows central banks to respond to economic conditions.
Maintaining a 2% target over the medium run provides stability while allowing for short-term deviations.
The balance between flexibility and stability is crucial for effective inflation targeting.
Central banks must consider external shocks when setting inflation targets.
Flexibility in targets helps manage the trade-off between inflation control and economic growth.
The Riksbank’s approach demonstrates the importance of adaptability in monetary policy.

Impact of larger economies on small open economies

Small open economies are significantly affected by the monetary policies of larger economies.
A small open economy is affected by policies in larger economies so that’s unavoidable

— Per Åsberg Sommar
The interconnectedness of global economies necessitates monitoring larger economies’ policies.
Small economies must adapt their monetary policies in response to external influences.
Larger economies’ policies can have spillover effects on smaller economies’ financial stability.
Central banks in small economies must be vigilant about global economic trends.
The Riksbank’s strategies reflect the challenges faced by small open economies.
Understanding global economic dynamics is essential for effective monetary policy in small economies.

The role of corridor systems in central banking

Central banks use corridor systems to stabilize short-term interest rates through operational frameworks.
Any operational framework where the central bank offers unlimited lending and deposit facilities is some variant of a corridor system

— Per Åsberg Sommar
The Riksbank introduced a wide interest rate band of 200 basis points.
Corridor systems are crucial for maintaining control over short-term interest rates.
The Riksbank’s approach targets the two-week interest rate to manage liquidity.
Corridor systems provide a mechanism for central banks to influence market interest rates.
The stability of short-term rates is vital for overall economic stability.
Understanding corridor systems is key to grasping central bank operations.

Liquidity management through certificates of deposits

The Riksbank uses certificates of deposits as a tool to manage liquidity, which differ from traditional reserves.
The Riksbank has this really interesting tool certificate of deposits that it can use to drain liquidity

— Per Åsberg Sommar
Certificates of deposits are tradable securities issued by the Riksbank.
Unlike reserves, certificates of deposits are financial assets used for liquidity management.
The Riksbank’s certificates are distinct from account-based money reserves.
Liquidity management involves balancing the supply of reserves and financial assets.
Certificates of deposits provide flexibility in managing the banking system’s liquidity.
The Riksbank’s approach highlights the importance of diverse tools in central banking.

Evaluating central bank effectiveness through reserves

One shouldn’t look at the size of the central bank’s balance sheet but rather the amount of reserves to gauge true liquidity.
One shouldn’t look at the size of the central bank’s balance sheet but look at the amount of reserves

— Per Åsberg Sommar
Reserves provide a more accurate measure of liquidity than balance sheet size.
Central banks’ balance sheets can be misleading indicators of financial health.
Focusing on reserves offers insights into the actual liquidity available in the economy.
The Riksbank emphasizes the importance of reserve levels in monetary policy analysis.
Understanding the role of reserves is crucial for assessing central bank operations.
Evaluating reserves provides a nuanced perspective on central bank effectiveness.

The Riksbank’s approach to liquidity management

The Riksbank manages liquidity in the banking system by balancing reserves based on demand and pricing of monetary policy instruments.
The Riksbank provides the amount of reserves banks demand given the current interest rate

— Per Åsberg Sommar
Balancing liquidity involves regular adjustments to maintain a scarce reserve system.
The Riksbank’s approach aims to ensure banks drive liquidity growth.
Managing liquidity is a dynamic process influenced by interest rates and reserve demands.
The Riksbank’s framework highlights the strategic intent behind its monetary policy.
The balance between surplus and deficit is crucial for effective liquidity management.
Understanding the Riksbank’s approach provides insights into central banking functions.

Effects of quantitative easing on liquidity

The Riksbank’s quantitative easing since 2015 has led to a significant liquidity surplus in the banking system.
Since 2015 for instance the Riksbank has conducted quantitative easing

— Per Åsberg Sommar
Quantitative easing involves the purchase of government bonds to increase liquidity.
The Riksbank’s actions during the corona crisis further increased liquidity.
A liquidity surplus can influence interest rates and economic activity.
The Riksbank’s quantitative easing highlights the impact of unconventional monetary policy.
Understanding the effects of quantitative easing is crucial for analyzing monetary policy.
The Riksbank’s experience provides lessons for other central banks considering similar measures.