Effectiveness of Monetary Policy in Sweden

Abstract

We study whether the sensitivity of Swedish interest rates to domestic economic news was affected by the zero lower bound (ZLB) and forward guidance. We find that the sensitivity was reduced at the ZLB at short but not at longer maturities, suggesting that monetary policy remained effective at longer horizons. Moreover, it was unaffected during a later period of the ZLB/negative policy rates, suggesting that monetary policy remained effective at all horizons then. We also find that the sensitivity of interest rates to domestic news was unaffected by forward guidance, suggesting that market participants understood the conditionality of the forward guidance. (JEL E52, E58) * We would like to thank an anonymous referee, Birger Vikoren, participants in the DNB Annual Research Conference 2014 on "Forward guidance and communication about unconventional monetary policy" and seminar participants at de Nederlandsche Bank and the Central Bank of the Republic of Turkey for helpful comments, and Agne Subelyte for excellent help with the data.

Connecting the dots: Market reactions to forecasts of policy rates and forward guidance provided by the Fed

“…These results are consistent with forward guidance and SEP forecasts being interpreted as conditional guidance and forecasts because market expectations continue to respond to macroeconomic news. This confirms the findings in Moessner and Nelson (2008) for the Reserve Bank of New Zealand's policy rate forecasts and the Fed's forward guidance prior to the financial crisis and is consistent with the results of Moessner et al (2016) for the Riksbank's policy rate forecasts.…”

“…We also find a significant impact of macroeconomic news on market participants' expectations of time to lift‐off. These results are consistent with forward guidance about policy rates and SEP forecasts being interpreted as conditional in nature because market expectations continue to respond to macroeconomic news, confirming the findings of Moessner and Nelson (2008) and Moessner et al (2016).…”

“…Several papers also show that market participants' interpret policy rate forecasts published by central banks under inflation targeting as Delphic (e.g. Moessner et al, 2016a). On the other hand, Goodhart and Rochet (2011) show that Swedish money market rates at longer horizons do not react to the surprise component in the future policy rate path published by the Riksbank.…”

“…4 A number of studies find strong evidence that FOMC forward guidance announcements move asset prices (e.g., Campbell, Evans, Fisher, & Justiniano, 2012; Del Negro et al, 2015; Gürkaynak, Sack, & Swanson, 2005 and Moessner, 2013, 2015). Several papers also show that market participants interpret policy rate forecasts published by central banks under inflation targeting as Delphic (e.g., Moessner, de Haan, & Jansen, 2016). On the other hand, Goodhart and Rochet (2011) show that Swedish money market rates at longer horizons do not react to the surprise component in the future policy rate path published by the Riksbank.…”

Quantitative or Qualitative Forward Guidance: Does it Matter?

“…"(RBNZ, 2014). This result is also consistent with the results ofMoessner and Nelson (2008) andDetmers and Nautz (2012) for New Zealand, and withMoessner et al (2016) andAhl (2017) for Sweden, who …nd that the conditionality of the central bank's interest rate forecasts was understood by market participants. This casts doubt over the concerns raised by some policymakers that central bank interest rate forecasts may be interpreted by market participants as unconditional commitments.…”