Working Paper: CEPR ID: DP8789
Authors: Lars E. O. Svensson
Abstract: The Riksbank faces challenges with regard to each of its three core functions, conducting monetary policy with the objective of stabilising inflation around the inflation target and resource utilisation around a sustainable level, promoting a safe and efficient payment system and thereby conducting a policy for financial stability, and managing its financial assets to attain a good risk-adjusted rate of return without prejudice to the first two core functions. I conclude that the challenges are best met by focusing monetary policy exclusively on stabilising inflation around the inflation target and resource utilisation around a sustainable level and not treating the policy rate, housing prices or household debt as separate explicit or implicit target variables, by not confusing monetary policy with financial-stability policy but treating them as separate policies, and by eliminating the large unnecessary currency risk in the Riksbank?s balance sheet.
Keywords: central bank; asset management; macroprudential policy; monetary policy
JEL Codes: E42; E52; E58; G18; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Riksbank's monetary policy focus on stabilizing inflation and resource utilization (E52) | better target attainment (L21) |
| Using the policy rate as an independent target (E52) | negatively impact inflation and resource utilization (E31) |
| Lack of focus on separate policies (E61) | confusion and ineffective outcomes (I12) |
| Low policy rates (E43) | excessive leverage (G32) |
| Better instruments for managing financial stability (E63) | not relying on monetary policy (E49) |