New issue of the journal Sveriges Riksbank Economic Review


Dear readers, This issue contains six articles about monetary policy and financial stability.

What is the explanation for the developments in inflation 1995-2015?

Björn Andersson analyses the driving forces behind the developments in inflation 1995–2015. He first uses the Riksbank's macroeconomic model, Ramses, to identify factors that have held back inflation during the period. Then he analyses the explanations for the weak development of inflation highlighted by the Riksbank in the Inflation Reports and Monetary Policy Reports. Two explanations that are considered particularly important are low import prices and strong growth in productivity. The second part of the article therefore focuses on these factors and on an assessment of to what extent they have surprised the Riksbank.

What effect does monetary policy have on interest rates?

Lina Fransson and Oskar Tysklind analyse the transmission mechanism for monetary policy by studying how different interest rates in the economy move when the repo rate is adjusted. This relationship is clearest for shorter market rates, the consequence of which is that the Riksbank can use the repo rate to control the very shortest interest rates in the economy. However, even the longer market rates, which are affected to a greater extent by the development of international interest rates and various risk premiums, also show relatively high covariation with the repo rate. The repo rate also has a close relationship with interest rates for households and companies, particularly at short maturities. The analysis shows that the interest rates are normally adjusted in line with changes in the repo rate.

Basel III – what and why?

Jonas Niemeyer analyses extensive changes to the global regulatory framework for banks made after the international financial crisis that began in 2007. The banks' capital adequacy has increased and new demands have been placed on their liquidity. Most of these changes have been implemented in accordance with agreements concluded by the Basel Committee on Banking Supervision. The article explains what the Basel Committee is, the background to the tightened regulations, what these regulations mean and why they are important for Sweden and Swedish banks. 

Does the capital market create problems for the economy?

Thomas Franzén examines whether excessively high required return on equity in companies has contributed to their investing too little in relation to what would be optimal for society. If economic policy continues to try to adapt to companies' excessive required return on equity, it could contribute to creating financial imbalances. There is then a risk that the development of the real economy would not be sustainable in the long term. The article therefore discusses how more reasonable return requirements can be created through stronger corporate governance, and what role economic policy can play in reducing the risks of financial imbalances arising.

Macroprudential policy in the Nordic-Baltic area: how does this cooperation work?

David Farelius and Jill Billborn describe how the collaboration between Sweden, Norway, Denmark, Finland, Iceland, Estonia, Latvia and Lithuania works with regard to macroprudential policy. There is a high degree of financial integration between the countries, which creates a need to jointly manage the risks to financial stability. The article describes the roles played by the authorities in the different countries, as well as which macroprudential policy tools have been introduced and how the different authorities cooperate. It concludes with a discussion of some of the challenges remaining with regard to financial stability work in the region.

Thinking about the future of money and potential implications for central banks

Paola Boel analyses how innovations on the markets for funding and payments may affect the operations of central and commercial banks. New technology is used, for instance, to apply for direct loans outside of the banking system (peer-to-peer lending), to seek crowdfunding for new projects or to use a virtual or digital currency (cryptocurrency) for payments. Technological innovations that contribute to an increase in lending outside of the traditional financial system can reduce the banks' liquidity requirements. The central banks may thus find it more difficult to influence the money supply and liquidity through interest rate setting. If payments are increasingly made through these new techniques, the central banks may also experience difficulty in overseeing the payment system. The conclusion is that it is important for central banks and supervisory authorities to closely follow these developments and to analyse their potential consequences.

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