New issue of the journal Sveriges Riksbank Economic Review

Date 20/03/2015

The central bank's mandate, objectives and deliberations

Magnus Georgsson, Anders Vredin and Per Åsberg Sommar give an overview of the academic debate on the central bank's mandate in a historical perspective which includes the global financial crisis.

They summarise the discussion on the responsibility modern central banks may have for price stability and payment systems, as well as supervision of individual financial institutions (microprudential policy) and the financial system as a whole (macroprudential policy). The monetary policy deliberations between the target for inflation and the target for a stable real economy are also discussed, as are various issues concerning the central bank's degree of independence.

They also describe the role a central bank may have in conjunction with a financial crisis by offering emergency liquidity assistance to financial institutions and how such assistance can be designed so as not to contribute to increased risk-taking in the financial system. The article concludes with a number of questions on the central bank's tasks in the future that have emerged partly as a consequence of the financial crisis.

Unconventional measures in monetary policy

Ferre De Graeve and Jesper Lindé analyse the central bank's possibilities for using unconventional monetary policy measures when inflation is low and the policy rate has approached its lower limit. They study experiences abroad and use a macroeconomic model for various simulations.

One alternative they study involves the central bank announcing (providing guidance) that the policy rate will remain low for longer than normal. If the decision is deemed credible by households and companies, monetary policy will immediately become more expansionary, contributing to rising inflation. Another alternative involves the central bank purchasing government and/or corporate bonds for longer maturities. This can contribute to lower term and risk premiums, thus making monetary policy more expansionary. In both alternatives, lower interest rates relative to those abroad may also contribute towards weakening the exchange rate, which increase import prices and normally leads to increased inflation. Similar conclusions are obtained from empirical studies, which indicates that unconventional measures can be used as a complement to conventional monetary policy interventions when inflation and the policy rate are very low.

New models for nowcasting

Michael Andersson and Ard den Reijer describe how a central bank can forecast the current state and immediate future of the economy with the use of what are known as nowcasting models. As outcome data is published with a time lag and the current situation is not yet known, such forecast models need to utilise the large number of indicators available in real time.

The article describes two methods for making such forecasts in the short term. The first method estimates many small models and then weighs their forecasts together. The second method weighs together information in several series and then makes a forecast. The new methods also make it possible to understand and interpret the forces that drive economic development and that are reflected by forecasts and forecast revisions.

The article also describes how the Riksbank's nowcasting system has been expanded with models that take account of the different frequencies at which indicator variables are observed and the different delays in their publication. The authors show how well a dynamic factor model, with the help of a more than 100 indicator variables at a monthly frequency, can forecast quarterly percentage changes in GDP. An application shows how GDP forecasts during the fourth quarter of 2008 were gradually revised downwards because the availability of new indicators changed the assessment of how much the global financial crisis affected the Swedish economy.