Breman: Monetary policy after corona – we need to think along new lines
“The pandemic and its economic consequences have made it perfectly clear that we cannot predict what the next economic crisis will look like – neither when it comes to what will trigger it nor what type of monetary policy response it may need.” These were the words of Deputy Governor Anna Breman when she spoke today at a webinar arranged by Swedbank. “This means that innovation and new thinking will be required in monetary policy for us to be able to continue to fulfil our task of maintaining price stability in Sweden.”
Date: 23/02/2021 09:00
Speaker: Deputy Governor Anna Breman
Monetary and fiscal policy contribute in different ways
So far during the corona crisis, monetary and fiscal policy have managed to complement each other well without any kind of formal cooperation. Monetary policy has been concentrated on both maintaining credit supply and keeping interest rates low. The focus of fiscal policy has been on helping companies in crisis-ridden sectors so that they can survive and not have to lay off staff and on providing support to households affected by the crisis.
“Because global interest rates are so low, we see that fiscal policy will be increasingly important going forward when it comes to managing recessions”, Anna Breman continued. “And there is already a need for us to discuss how we can be best prepared for new crises by fiscal and monetary policy working in tandem. We also need to examine what the boundary between monetary policy and fiscal policy should look like.”
Monetary policy needs a larger toolbox
This becomes particularly important when we consider how we can expand the monetary policy toolbox and thus create more room for manoeuvre to combat recessions and maintain price stability. “I think we have managed to think along new lines during the crisis, and we see this not least in the new tools we have used, such as asset purchases of various kinds. And I consider it fully possible to expand the toolbox further”, said Anna Breman. She discussed four different tools that the Riksbank has yet to use but that are prevalent in the international debate: deeply negative interest rates, dual interest rates, yield curve control and helicopter money.
If more monetary policy stimulus were to be required in the short term, the tools Anna Breman sees closest to hand are a negative repo rate and increased quantitative easing. “But none of the tools I have discussed today can be ruled out, provided they are lawful”, Anna Breman emphasised.
Flexibility is required
One effect of the pandemic is that it has accelerated changes in the economy which create both challenges and opportunities for the Riksbank. “We therefore need to constantly adapt to a changing world and improve our analysis so that we can achieve the inflation target and contribute to healthy economic development otherwise”, Anna Breman said in conclusion.