Åsberg Sommar: Historical national bank data are crucial for macroeconomic theory, Sweden’s transition to a 2% inflation target, and the impact of large economies on small open economies.

Important points

• Historical data from national banks is very important for testing macroeconomic theories.
• The National Bank formally adopted a 2% inflation target in 1995 after allowing the Swedish krona to fluctuate.
• Flexible inflation targeting allows us to respond to supply shocks while maintaining our medium-term goals.
• Small open economies are highly influenced by the monetary policies of larger economies.
• Central banks use the corridor system to stabilize short-term interest rates.
• National banks employ certificates of deposit to manage liquidity, as opposed to traditional reserves.
• Assessing the effectiveness of a central bank should focus on reserves rather than balance sheet size.
• National banks balance their reserves based on demand and pricing of monetary policy instruments.
• Quantitative easing by the Riksbank since 2015 has created a significant liquidity surplus.
• The Riksbank aims to maintain a scarce reserve regime to ensure that banks can promote liquidity expansion.
• The Riksbank’s operating framework includes balancing liquidity to make the system scarce.
• National bank certificates of deposit, unlike account-based deposits, are tradable securities.
• The Riksbank’s approach to liquidity management emphasizes the importance of reserve levels.

Guest introduction

Mr. Per Åsberg Sommar is a Senior Advisor in the Markets Department at the Sveriges Riksbank, Sweden’s central bank. Previously, he was the head of market strategy for the same division. He is co-author of an important study on the reform of the national bank’s monetary policy implementation and operating framework.

The importance of historical data in macroeconomic research

• Historical data on national banks is invaluable in testing macroeconomic theories.

• My friend Josh Shenrickson and I know that others are using that data to test macroeconomic theories, such as the long-run neutrality of money.

  — Åsberg Sommar

• Historical data provides practical applications in modern economic analysis.
• The importance of historical data lies in its ability to test and refine macroeconomic theories.
• Researchers use historical data to understand long-term economic trends and patterns.
• National Bank data is an important source of information for economists studying the effects of monetary policy.
• Historical data allows you to study economic phenomena over long periods of time.
• National Bank archives serve as a basis for empirical research in economics.

Sweden’s transition to inflation targeting

• The National Bank adopted a formal inflation target of 2% in 1995 after allowing the Swedish krona to fluctuate.

• After allowing the Swedish krona to fluctuate, the National Bank formally adopted inflation targeting in 1995.

  — Åsberg Sommar

• Initially, the inflation target included a range of 2% plus or minus 1%, but this was abolished in 2010.
• The formal adoption of inflation targeting marked a major change in Swedish monetary policy.
• Inflation targeting aims to provide a stable economic environment by controlling the price level.
• The National Bank’s decision reflects a broader global trend toward inflation targeting in central banks.
• The 2% target is aimed at anchoring inflation expectations and maintaining economic stability.
• The evolution of inflation targeting in Sweden highlights the adaptability of the monetary policy framework.

Inflation targeting flexibility

• Flexible inflation targeting allows us to respond to supply shocks while maintaining our medium-term goals.

• The band’s argument is that there is a supply shock, so some flexibility is needed.

  — Åsberg Sommar

• The flexibility of inflation targeting allows central banks to respond to economic conditions.
• Maintaining a 2% target over the medium term provides stability while allowing for short-term deviations.
• Effective inflation targeting requires a balance between flexibility and stability.
• Central banks need to take external shocks into account when setting inflation targets.
• Flexible targeting helps manage the trade-off between inflation control and economic growth.
• The National Bank’s approach demonstrates the importance of adaptability in monetary policy.

The impact of large economies on small open economies

• Small open economies are heavily influenced by the monetary policies of larger economies.

• This is inevitable because small open economies are influenced by the policies of larger economies.

  — Åsberg Sommar

• The interconnectedness of the global economy necessitates monitoring the policies of the larger economy.
• Smaller economies need to adapt their monetary policies in response to external influences.
• The policies of large economies can have spillover effects on the financial stability of smaller economies.
• Central banks of small economies need to be vigilant about developments in the global economy.
• The National Bank’s strategy reflects the challenges faced by small open economies.
• Understanding global economic trends is essential for effective monetary policy in small economies.

The role of the corridor system in central banks

• The central bank employs a corridor system to stabilize short-term interest rates through its operational framework.

• Any operating framework in which a central bank provides unlimited lending and deposit facilities is a variant of the corridor system.

  — Åsberg Sommar

• The National Bank introduced a wide interest rate band of 200 basis points.
• Corridor systems are important for maintaining control of short-term interest rates.
• The Riksbank’s approach targets two-week interest rates to manage liquidity.
• The corridor system provides a mechanism for central banks to influence market interest rates.
• Stability of short-term interest rates is essential for the stability of the economy as a whole.
• Understanding the corridor system is key to understanding central bank operations.

Liquidity management through certificates of deposit

• National banks use certificates of deposit as a tool to manage liquidity, which is different from traditional reserves.

• National banks have a very interesting tool certificate of deposit that can be used to drain liquidity

  — Åsberg Sommar

• Certificates of deposit are tradable securities issued by the Riksbank.
• Unlike reserves, certificates of deposit are financial assets used for liquidity management.
• National bank certificates are different from account-based reserves.
• Liquidity management involves balancing reserves and the supply of financial assets.
• Certificates of Deposit provide flexibility in managing liquidity in the banking system.
• The National Bank’s approach emphasizes the importance of a variety of tools in central banking operations.

Assessing central bank effectiveness through foreign exchange reserves

• To measure true liquidity, we should look at the amount of reserves, not the size of a central bank’s balance sheet.

• We should look at the amount of reserves, not the size of a central bank’s balance sheet.

  — Åsberg Sommar

• Reserves provide a more accurate measure of liquidity than balance sheet size.
• Central bank balance sheets can be a misleading indicator of financial health.
• Focusing on reserves provides insight into the actual liquidity available in the economy.
• The National Bank emphasizes the importance of reserve levels in monetary policy analysis.
• Understanding the role of reserves is critical to evaluating a central bank’s operations.
• Assessing foreign exchange reserves provides a nuanced perspective on central bank effectiveness.

Riksbank’s approach to liquidity management

• National banks manage liquidity in the banking system by balancing reserves based on demand and pricing of monetary policy instruments.

• The National Bank provides the amount requested by the Reserve Bank taking into account current interest rates.

  — Åsberg Sommar

• Balancing liquidity requires regular adjustments to maintain a scarce reserve system.
• The Riksbank’s approach aims to ensure that banks drive increased liquidity.
• Liquidity management is a dynamic process influenced by interest rates and reserve requirements.
• The National Bank’s framework emphasizes the strategic intent behind its monetary policy.
• Balancing surpluses and deficits is important for effective liquidity management.
• Understanding the approach of national banks provides insight into the functioning of central banks.

Impact of quantitative easing on liquidity

• The Riksbank’s quantitative easing since 2015 has created a significant liquidity surplus in the banking system.

• For example, since 2015, national banks have implemented quantitative easing.

  — Åsberg Sommar

• Quantitative easing involves buying government bonds to increase liquidity.
• The Riksbank’s actions during the corona crisis have further increased liquidity.
• Liquidity surpluses can affect interest rates and economic activity.
• The Riksbank’s quantitative easing highlights the impact of unconventional monetary policy.
• Understanding the effects of quantitative easing is critical to analyzing monetary policy.
• The National Bank’s experience holds lessons for other central banks considering similar measures.