When inflation started to rise rapidly at the end of 2021, the Riksbank was eventually expected to adjust its monetary policy quite substantially. The Riksbank also started to do this in April 2022. Since then, the Executive Board has raised the policy rate by 2.5 percentage points, and the interest rate path has been revised upwards significantly. At the end of 2024, financial market participants now expect the policy rate to be more than 2 percentage points higher than they expected in November 2021. This is reflected in the fact that yields on 5- and 10-year government bonds have also risen by about 2 percentage points, while yields on five- and ten-year index-linked government bonds have risen by about 1.5 percentage points.

One way of analysing the effects of such changes in monetary policy that are also expected to last for a longer period of time is to look at more persistent changes in the policy rate in the macro models. Figure 2 shows the effects of monetary policy as the median of a large number of different structural models estimated using data from the US and the euro area, assuming different degrees of persistence in monetary policy.^[5] To show that the results do not depend on the choice of a particular type of macro model, we study a large variety of macro model types, which have been compiled in "The Macroeconomic Model Data Base" (MMB version 2.3, www.macromodelbase.com), see Wieland et al. (2016). We use 57 models of which 40 are estimated on US data and 17 on euro area data. What is shown in Figure 2 is the median of these 57 models. The results are not sensitive to whether we also include models where agents’ expectations adjust gradually. Monetary policy is determined in all models by the same monetary policy rule, and we vary the persistence of monetary policy rate changes by changing the interest rate smoothing parameter in the rule. For a temporary, normal and persistent change in interest rates, we have calibrated the parameter to 0.081, 0.8103 and 0.95, respectively. An alternative approach to calculating expected interest rate paths is discussed in Laséen and Svensson (2011). For each model and experiment, we calculate the effects of an unexpected increase in the policy rate by an average of one percentage point over the first year. We start with a rate increase that is highly temporary and thus has very minor effects on the five-year real interest rate. Next, we study an increase that more closely follows the normal pattern of exogenous changes, leading to an increase in the five-year real interest rate in line with Maja and Selma in Figure 1. Finally, we show the effects of a rate rise that is more persistent than historical patterns and thus leads to a larger increase in the five-year real interest rate. In all three cases, the policy rate is initially raised by an average of one percentage point over a year.^[6] Figure 2 shows the median of the effects in the different models, but the average is not significantly different from the median. We obtain similar results if we do this experiment in Maja and Selma.

Figure 2. Effects of an interest rate increase with different persistence in a number of models Percentage points and per cent respectively

To begin with, note that Figure 2 shows that a "normal" increase in the policy rate has effects very similar to those for Maja and Selma that we saw in Figure 1. We can also see that an even more temporary increase has almost non-existent effects. But when the rate rise is expected to be more persistent, the effects are significantly larger: the five-year real interest rate rises almost three times more than usual, while inflation reacts more than six times more to monetary policy. The strength of the interchange between monetary policy and inflation and GDP thus depends to a large extent on the expected persistence of a policy rate change.^[7] Coibion (2012) shows that the size of the effects of exogenous changes in monetary policy in empirical time series models depends on the size of the monetary policy shock and the persistence of the interest rate change. The fact that the strength of the interchange between monetary policy and inflation depends on the persistence of monetary policy is thus also an important aspect in purely empirical models. The reason for this is that a rate increase that is more persistent has much larger and longer-lasting effects on the interest rates offered to households and companies, and thus has greater effects on aggregate demand in the economy.^[8] Almenberg et al. (2022) show a similar result for housing prices. They show that if housing prices reflect user costs and households are forward-looking, higher expected interest rates in the longer term have the largest impact on price developments.

Since 2021, monetary policy has been tightened in many countries, including Sweden. In most of these cases, this is expected to be a very persistent change in monetary policy, and longer-term interest rates have already risen significantly. Figure 2 suggests that such a large and persistent change in monetary policy could have large effects on inflation and the wider economy. Or conversely: If monetary policy had not been tightened in the way it is being now, inflation would have been considerably higher than we now expect.

Thus, the estimates of the impact of monetary policy on inflation that are often reported have small effects because these changes are not expected to last for a long time. They therefore risk misrepresenting the impact on inflation of the interest rate increases that have now been implemented.

This is not to say that it will be an easy task for central banks to bring inflation back to target. There are many other influencing factors, such as how the economy develops, how fiscal policy is conducted and what further shocks occur along the way.