Working Paper: CEPR ID: DP15468
Authors: Philippe Bacchetta; Pauline Chikhani
Abstract: The Swedish krona depreciated sharply between 2013 and early 2020 but standard modelsare unable to explain this depreciation. This paper reviews the experience of the krona.By estimating an "equilibrium" value for the real exchange rate, we confirm a growingundervaluation after 2014. The depreciation could initially be explained by a decline ininterest rates and then by quantitative easing and the Riksbank communication regardingthe krona. However, monetary policy cannot explain the extent of the depreciation nor thelong depreciation period of seven years. We then review various complementary explanationsproposed in the literature including, imperfect information, financial frictions, the role offinancial shocks and the convenience yield. Many of these elements can plausibly explainthe weakness of the krona, but cannot be quantified.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decline in interest rates (E43) | Depreciation of the Swedish krona (F31) |
| Implementation of quantitative easing (E52) | Depreciation of the Swedish krona (F31) |
| Imperfect information (D83) | Depreciation of the Swedish krona (F31) |
| Financial frictions (G19) | Depreciation of the Swedish krona (F31) |
| Financial shocks (F65) | Depreciation of the Swedish krona (F31) |
| Liquidity issues in the bond market (G10) | Depreciation of the Swedish krona (F31) |
| Growing undervaluation of the krona since 2014 (F31) | Depreciation of the Swedish krona (F31) |