2018’s second edition of the Economic Review covers both broad and more specific issues relevant to the Riksbank. Two articles have been written by former and current advisers to the Riksbank and discuss the Riksbank’s 350-year history and the interaction between fiscal policy and monetary policy. The other articles are written by economists working at the Riksbank and describe the various operational frameworks for implementing monetary policy used by the Riksbank since the mid-1880s, and a method for calculating market expectations of inflation by using yields on nominal and real government bonds.
The political economy of the Riksbank
Torsten Persson describes important historical reforms of Sweden’s monetary institutions to ensure price stability and a safe and efficient payment system. The article takes a stepping stone in modern institutional economics, where institutional reforms are seen as the result of large and important events, or of conflicts of interest. The author argues that the Riksbank’s history over 350 years often repeats itself. With regard to the payment system, the question of competition vs. monopoly reoccurs over and over again. With regard to price stability, the focus alternates between, on the one hand, the importance of a nominal anchor and, on the other hand, the short-run temptation to use the power over money.
Sweden’s fiscal framework and monetary policy
Eric Leeper’s article reminds us of the important insight that basic economic theory suggests that monetary policy and fiscal policy always jointly determine aggregate demand for goods and services and the general price level in the economy. In his article, Leeper analyses Sweden’s monetary and fiscal policy frameworks in light of this insight. He argues that the theory and recent developments in Swedish inflation and interest rates raise the question of whether the two macroeconomic policy frameworks are mutually consistent.
The Riksbank’s operational framework for monetary policy 1885–2018
Peter Sellin describes how the Riksbank’s operational framework for steering interest rates in the economy with various types of economic instrument has changed since the mid-1880s. He shows how these changes have been driven by changes in the environment in which the Riksbank operates as well as by the stated aims of its monetary policy.
Liquidity premiums in the Swedish inflation-indexed government bond market
Lisa Alexandersson writes that the difference between nominal and real bond yields, the so-called inflation compensation, has become an important source of information for central banks in measuring market participants’ inflation expectations. Unlike other measures of expectations, such as questionnaires, the inflation compensation can be based on high-frequency data. However, studies have shown that inflation compensation is affected by risk premiums, such as liquidity and inflation risk, which can reduce their information value. In this article the author develops a method for taking these premiums into account, and presents corrected measures for market participants’ true inflation expectations available daily.