What does research say about the effects of central bank balance sheet policies?

Economic Commentaries, News Central banks’ purchases of assets and other forms of balance sheet policies have had a positive effect on output and inflation. This is the conclusion of an analysis of the research literature carried out in the United States, the euro area and the United Kingdom.

In a time when traditional monetary policy tools such as the policy rate is approaching the possible lower bound, central banks in many parts of the world had to expand their toolboxes. An increasing number of them have therefore taken measures that have caused their balance sheets to increase.

For instance, in November in Sweden the Riksbank decided to purchase securities for up to SEK 700 billion, to counteract the effects of the coronavirus pandemic. Previously, the Riksbank has implemented balance sheet policies during the financial crisis period of 2008-2010 and during 2015-2017.

This type of measures have so far only been implemented during a limited period of time, so how can we know what effect they have on economic conditions? The Riksbank’s Senior Economist Paola Di Casola, working at the Modelling Division in the Monetary Policy Department, tackles this question by using a collection of earlier empirical research studies for the euro area, the United States and the United Kingdom compiled by Fabo et al. (2020).

On average, the results show positive effects on both output and inflation. The effects are on average two to three times greater in the United States than in the euro area and the United Kingdom, but the differences across countries may be explained to some extent by the selection of studies for the respective country, rather than differences in the estimated effects per se.

What conclusions can be drawn about the effects in Sweden? Paola Di Casola notes in her Economic Commentary that there is a shortage of research literature describing the effects on a small open economy like Sweden. The effects may be different in Sweden compared to, for instance, the euro area and the United States, partly because the exchange rate channel is particularly important for Sweden. In addition, balance sheet policies conducted in other countries may have a substantial impact on the Swedish economy.

All in all, Paola Di Casola concludes that further research is necessary before one can reach any firm conclusions regarding the effects of central bank balance sheet policies in Sweden.

Read the Economic Commentary to see what research says about the effect of central bank balance sheet policies below.

By Paola Di Casola. The author works in the Riksbank’s Monetary Policy Department.

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Updated 24/02/2021