Monetary policy implementation

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Monetary policy Stefan Ingves

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Monetary policy implementation with inflation target

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The world’s oldest central bank1668 Sveriges Rikes Ständers Bank1661 Palmstruch - first banknotes1701 The Riksbank issues “transport” notes1830s Commercial banks are established1904 Monopoly on issuance of banknotes1866 Sveriges Riksbank1999 New legislation makes bank independent

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An authority under the Riksdag

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Economic policy

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The Riksbank’s governingThe RiksdagGeneral Council 11 membersExecutive Board 6 members

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The executive board of the RiksbankStefan IngvesKarolina EkholmBarbro Wickman-ParakLars NybergLars E.O. SvenssonSvante Öberg

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The Riksbank’s tasksTo safeguard the value of money (=price stability) - Oversee and analyse monetary stability - Conduct monetary and exchange rate policy measures - Manage the foreign exchange reserve To promote a safe and efficient payment system - Oversee and analyse stability in the payment system - Responsibility for the RIX system - Ensure the supply of banknotes and coins

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CPI-inflation and historical mean Annual percentage changeSources: Statistics Sweden and the Riksbank

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Different monetary policy regimesSource: The RiksbankNote. The vertical line marks the date for the shift in monetary policy regime, 19 nov 1992.

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An independent RiksbankUp to 1999: Conducted monetary and exchange rate policy.General Council 4 yearsRiksbank Governor 5 yearsAfter 1999: Price stabilityGeneral Council 4 yearsExecutive Board 6 years

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The Riksbank’s organisationResearch

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Monetary policy theory Why a price stability target?Monetary policy can not affect employment in the long run Establishing inflation expectations High and fluctuating inflation increases uncertainty and affects investment Costly to hold back inflation High inflation leads to redistribution of income and wealth One instrument – one target

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Inflation expectations by money market agents Per centSources: Statistics Sweden and Prospera Research AB

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Why one to two years ahead? Uncertainty over the transmission mechanism Reduce fluctuations in the real economy

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Forecasts6 monetary policy meetings per year (2008) 3 Monetary Policy Reports 3 updated assessments 2 public hearings before the Riksdag Committee on Finance

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Repo rate with uncertainty bands Per cent, quarterly averagesSources: The RiksbankNote. Broken lines represent the Riksbank’s forecast.

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CPI with uncertainty bands Annual percentage changeSource: Statistics Sweden and the RiksbankNote: Broken line is the Riksbank’s forecast

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GDP with uncertainty bands Annual percentage change, seasonally-adjusted dataSources: Statistics Sweden and the RiksbankNote. Broken lines represent the Riksbank’s forecast.

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*Optimal monetary policyWithin a theoretical framework: Minimize quadratic forecast loss function = , mean inflation forecast at t for period mean output gap forecast,  constant relative weight on output-gap stabilization

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*BCA0EDModified Taylor curves (ex-ante) and optimal monetary policy choice

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Estimated inflation and GDP gap Percentage deviation from the target and HP trendSources: Statistics Sweden and the RiksbankNote. Broken lines represent the Riksbank’s forecast.

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Production as a Cobb-Douglas function and A = Technology, K = Capital , H = Hours worked, = average hours per worker L = Labour and α = constant *

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Estimated gaps Percentage deviation from the HP trendSources: Statistics Sweden and the RiksbankNote. Broken lines represent the Riksbank’s forecast.

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Signalling – influencing expectationsMonetary Policy Reports Policy rates and policy rate forecasts Minutes of monetary policy meetings Speeches – clearifying standpoints afterwards, signalling in advance just in exceptional cases

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Signalling - Policy rate and 3 month treasury bills ProcentSource: The Riksbank

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Last Updated: 8th March 2018

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