Skingsley: A new playing field for monetary policy: What can a small, open economy expect?
“If monetary policy seems to have lost its magic touch, what can central banks do?“ asks Deputy Governor Cecilia Skingsley, speaking at Kammarkollegiet’s capital market day on Thursday.
Despite negative interest rates and other monetary policy stimulation, inflation is far below target in many countries. Scope for monetary policy seems, quite simply, to be shrinking. The most important reason for this is probably the low global level of interest rates, which has led several central banks to choose unconventional methods with the aim of stimulating the economy and meeting their inflation targets.
Countries with floating exchange rates still have monetary policy autonomy
But the globalisation of the financial markets is also important, says Skingsley, as one of its results may be that the actions of large central banks are restricting smaller central banks' room for manoeuvre and, in some ways, limiting their monetary policy independence. Skingsley notes, however, that countries with variable exchange rates seem to have found it easier to maintain a certain degree of autonomy and thereby dampen the effects of global financial and monetary fluctuations.
Temporarily restricted autonomy when the inflation target is defended
But there may arise situations in which these countries' central banks become highly dependent on the actions of larger central banks. Developments in Sweden in recent years provide an example of this. In light of low inflation and inflation expectations that exhibited a falling trend for a time, it has been important to avoid an excessively rapid appreciation of the krona. In this context, it has been vital to follow the ECB's policy, with its comprehensive asset purchases and other measures.
Preparedness for a different monetary policy playing field
Now that Swedish inflation is starting to approach the target, it may be time to think about the conditions for monetary policy over a longer perspective, according to Skingsley. If it has become more difficult to conduct monetary policy, what can the Riksbank and other central banks do?
Skingsley says that it will not be possible, in the future, to conduct monetary policy in the way and with the impact we have previously been accustomed to. And this is something for which we need to prepare ourselves. She notes that, alongside cutting the policy rate to below zero and purchasing securities, so-called helicopter money could provide a hypothetical path to take to increase scope for monetary policy.
"It is probably something that should not be tried until other possibilities have been exhausted. However, considering the difficulties that are weighing many of the world's economies down, I think that it is wise to discuss the different possibilities, without closing any doors," says Skingsley.
She also examines the possibilities of raising the inflation target to create a greater degree of freedom in monetary policy.
Greater acceptance of falling short of the target
Skingsley rounds off by noting that central banks in the future may be forced to accept below-target inflation for longer periods of time. "This will be a matter of convincing economic agents that monetary policy needs to be more "flexible" and that the flexibility is due to monetary policy not really being as efficient as it was previously perceived to be."
