New issue of the journal Sveriges Riksbank Economic Review

What does a financial index for Sweden show?

Lina Fransson and Oskar Tysklind have constructed an index that provides a snapshot of the overall general financial conditions in Sweden. The index is based on twelve financial variables that together show how the financial conditions have developed between 1998 and 2016. The analysis shows that the index captures both events on the financial markets and historical economic fluctuations relatively well and that it has been an early indicator of GDP development. Another conclusion is that the index includes information that complements other early indicators that are normally used to make forecasts for GDP growth in the short term, for example the Purchasing Managers' Index and the Economic Tendency Survey.

Have the Riksbank's forecasts been governed by the models?

Jesper Lindé and André Reslow analyse how much influence macroeconomic models have had on the Riksbank's forecasts for GDP growth, inflation and the repo rate. The analysis shows that the models do not explain the Riksbank's forecasts to the extent sometimes claimed by external critics and reviewers. The Riksbank's mediumterm forecasts are mainly based on assessments rather than on models – the direct contribution from the models has actually been rather small during the period 2006- 2016. The view that the Riksbank blindly relies on and follows its models is, according to the authors, misleading and merely a myth. They also claim that the perception that the Riksbank relies on models in which inflation always returns to the target "by itself" within the forecast horizon is a myth.

What are the alternatives to inflation targeting?

Björn Andersson and Carl Andreas Claussen present the discussion on monetary policy with an inflation target that has taken place in a number of countries after the global financial crisis of 2007-2009. It has been claimed, for instance, that inflation targeting does not give sufficient consideration to the real economy and to risks and imbalances in the financial system. Moreover, it has been claimed that so-called level targets are better than the inflation target, particularly in the current situation when inflation is below the target and the interest rate is close to its lower bound. The authors analyse the criticism of inflation targeting and the alternatives proposed. When discussing alternatives to inflation targeting, they point out that it is important to remember that monetary policy with an inflation target both could and should be flexible. It should stabilise both inflation and the real economy. It can also take imbalances and risks in the financial markets into consideration, even if this is an issue that is still being discussed, both internationally and in Sweden.

Inflation target and interval – what are the pros and cons?

Mikael Apel and Carl Andreas Claussen analyse the pros and cons of different variants of an inflation target that involves an interval. They first review the international debate of ten to fifteen years ago on how an inflation target should best be designed, and then discuss the arguments in the Swedish debate in light of this. One central conclusion is that, if the inflation target is credible, monetary policy can be flexible and consider factors other than inflation, such as output and employment, even without an interval. However, a tolerance interval could contribute towards increased flexibility if it increases the credibility of the inflation target. However, it could also reduce flexibility if moving outside the interval is very costly. A target interval entails a major change to the monetary policy framework. Such an interval would provide the possibility of aiming at different levels for inflation, but, as inflation expectations may become less firmly anchored, economic fluctuations may become greater.

How can term structure models be used by central banks?

Rafael Barros De Rezende provides an overview of recent developments in term structure modelling and its uses by central banks. It is very much a question of extracting economically relevant information from long-term market rates and of how the interest rate level can be affected by policy measures. The author analyses models with timevarying risk premia that can be used by central banks to estimate the expectations of market participants regarding future policy rates and the effects of unconventional monetary policy measures. In addition, the models can be used to estimate inflation and liquidity risk premia on the inflation-indexed bond markets. Another important area is the analysis of the aggregate effect of different types of monetary policy measures, where the normal policy rate is close to its lower bound, with the aid of the so-called shadow rate.

Can banknotes and coins be complemented by electronic central bank money?

Gabriele Camera shows how the concept of money rapidly changes as a result of innovations in the area of computer-based encryption technology. Technological development has made it possible to create cost-effective electronic alternatives to banknotes and coins. The author takes the scientific literature in the field as his starting-point and defines what money is and how it is used. Deeper analysis follows of the opportunities and difficulties involved in issuing new types of money or means of payment. A central issue is to what extent the central bank is more suited to issuing electronic money than private agents.