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

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.