The Riksbank, like several other central banks, has made purchases of securities to be able to conduct a more expansionary monetary policy in a situation where the policy rate is close to its effective lower bound. During the pandemic, the aim was to support the Swedish economy by keeping interest rates low, facilitating access to credit and liquidity and avoiding the prevailing uncertainty triggering a financial crisis. See for example Sveriges riksbank (2020), Sveriges riksbank (2022e), Sveriges riksbank (2022b), Sveriges riksbank (2022c) and Sveriges riksbank (2022g). The monetary policy decisions on asset purchases were made after consideration of the advantages and disadvantages of the purchases. The risk of losses was one of the disadvantages, but the benefits of making the purchases were assessed to outweigh the disadvantages. See for example Sveriges riksbank (2021a), Sveriges riksbank (2022d), Flodén (2016), Flodén, Tal: Hur stor bör Riksbankens balansräkning vara i framtiden? (2018), Ingves (2020) and Skingsley (2022) for discussions of the risk of losses.
The Riksbank's task is not to generate profits
The Riksbank has not purchased securities for the purpose of managing them to generate profits. An evaluation of monetary policy-motivated asset purchases needs to take into account the broad impact on the economy and the financial markets, where possible losses for the Riksbank are only one of several aspects. In other words, whether the purchases have been a ‘bad or good deal for the Riksbank’, based on its targets, is not determined by the difference between the market value of the securities portfolio at a certain point in time and its purchase value.
The asset purchases by the Riksbank and other central banks is judged to have had positive effects on the economy. The purchases have contributed to lower interest rates that stimulate consumption and investment. This in turn has meant higher economic activity and lower unemployment. For a review of the different channels through which asset purchases affect the economy, see for example Melander (2021) and Johnson, Kozicki, Priftis, Suchanek, & Yang (2020). Asset purchases have also contributed to higher inflation and higher inflation expectations, which was very important as inflation during this period was below the inflation target. The purchases are thus also expected to have contributed to maintaining the credibility of the inflation target, which is important for good long-term economic development.
Asset purchases have had positive effects on public finances
Although they have not been the aim of the asset purchases, lower interest rates and higher economic activity have also strengthened public finances. These positive effects have probably been greater than the Riksbank's losses discussed above. We illustrate this with some simple exemplifying arithmetic:
- According to calculations made at the Riksbank, the asset purchases in 2015-2021 have meant that the term premium, and thus yields on government bonds with longer maturities, have been on average 0.4 percentage points lower during the period. This has stimulated demand in the economy and the GDP level has on average been around 0.25 per cent higher. If this higher GDP level is totalled during the period 2015-2021, it will be approximately SEK 80 billion. These effects are calculated using a general equilibrium model developed by Kolasa & Wesołowski (2020) that has been adapted to Swedish conditions. The effects are less than those reported in other studies and can therefore be seen as conservative estimates of the effects of the Riksbank's asset purchases. For example, see Melander (2021) for estimates of effects on financial variables, including government bond rates for Sweden, and Di Casola (2021) for a compilation of effects on GDP and inflation for the euro area, the United States and the United Kingdom, based on a large number of research studies. See also, for example Bhattarai & Neely (2022), for a review of research into the effects of non-conventional monetary policy.
- Higher GDP contributes to stronger public finances by increasing tax revenues and reducing expenditure, for example, on unemployment benefits. With a so-called budget elasticity of 0.5, the positive GDP effects mean an increase in public finances in the magnitude of around SEK 40 billion during the period. The budget elasticity shows how much government finances strengthen, as a percentage of GDP, when the GDP gap (resource utilisation) rises by 1 percentage point. See Konjunkturinstitutet (2018) for calculations of its size.
- Central government and local government new borrowing during the period amounted to approximately SEK 1 100 billion with an average maturity of seven years, which has resulted in lower interest costs for this borrowing by approximately SEK 30 billion as a consequence of the asset purchases. This calculation only covers bond borrowing in Swedish kronor by the Swedish National Debt Office and Kommuninvest. In addition, many municipalities issue bonds in their own name. They have also benefited from lower borrowing costs. This calculation only takes into account direct borrowing costs and the public sector also has financial assets, which complicates the calculations. The public sector also has interest-bearing assets whose return may have been adversely affected by the Riksbank's acquisition of assets. At the end of 2021, the public sector had interest-bearing assets (deposits, securities, loans, interest-rate funds and trade credits) worth SEK 1 846 billion and interest-bearing liabilities (deposits, securities, loans and trade credits) worth SEK 2 317 billion. Interest-bearing liabilities thus exceeded assets by SEK 471 billion. Overall, the public sector has a net financial wealth, but it mainly consists of shares whose return is likely to have been positively affected by the Riksbank's acquisition of assets. A full assessment of the aggregate effects on the public sector’s interest costs and capital income as a result of the Riksbank's asset purchases is far beyond the objective of this Economic Commentary.
Stronger public finances are only one effect of asset purchases. The overall effect of higher production and employment is much more important for the economy and social welfare, but we leave it to others to analyse this. In addition, the asset purchases decided during the coronavirus crisis in 2020 helped to reduce the risk of a severe credit crunch or a financial crisis. The potential gain for the economy from this is very large, but it is not captured in the calculations presented here.