Anna Seim: Difficult to forecast, but the krona can be understood

Analysing the development of the krona is complex because it is affected by several factors. In the short term, the krona exchange rate is driven by financial flows between countries, while classical explanations such as international trade flows only become more important in the longer term. When several factors are combined, explanations emerge as to why the krona has weakened, as well as strengthened, so much over time.

But even if these factors can explain the development of the krona fairly well in hindsight, it is still notoriously difficult to predict.

Anna Seim says that “Financial markets are so complex, and the shocks to them and to the macroeconomy so large and frequent, that predictions about the future rarely materialise.”

The krona exchange rate is important to the Riksbank as it has both direct and indirect effects on inflation and economic activity, and thus affects the conditions for attaining the inflation target. Ms Seim points out that the Riksbank monitors the development of the krona very closely and constantly conducts analytical work to better understand its driving forces.

She notes that the Swedish krona both engages and concerns, but also adds that while the krona can be understood and influenced, it does not determine a country's welfare.

“The research literature clearly shows that what matters for a country's long-term welfare are strong institutions and an environment that creates incentives for education, innovation and development – not the development of the exchange rate.”