7 One implication of a relatively stronger exchange rate channel may be that, in the future, it may become even more important to small, open economies. This, in turn, may entail a number of complications, as exchange rate adjustments are sometimes associated with attempts to manipulate the value of a country’s own currency and “beggar-thy-neighbour” policies. However, as I have said, this is only a hypothesis so far, and more empirical evidence is needed regarding how globalisation has affected the monetary policy transmission mechanism. The debate on how much large central banks’ actions affect monetary policy in small countries will continue, as will the general discussion of the effects of globalisation on the possibilities for monetary policy. However, at present, it seems reasonable to assume that the low global interest rate poses a greater challenge when it comes to which monetary policy can be conducted in countries such as Sweden. 6  Caceres et al. (2016) define autonomy-restricting effects of foreign interest rates as the response in the domestic interest rate above and beyond what is justified by domestic economic circumstances. They find that, with this definition, the empirical analysis indicates significantly greater monetary policy autonomy in small, open economies than more traditional estimates suggest. See also Disyatat and Rungcharoenkitkul (2015). 7  See Meier (2013) and Georgiadis and Mehl (2015).
It may also be difficult for an individual central bank to raise the inflation target alone as long as an international debate is underway on whether or not a higher target would be advantageous. 13 There may be reason to wait for a reasonable degree of consensus among central banks and in the research community. If the conclusion were reached that raising the inflation target would be justifiable, this would probably also increase the possibility that several central banks would simultaneously decide to do so. This would probably further increase confidence for such a measure. Greater acceptance of falling short of the target? If monetary policy should now turn out to be less effective in the period ahead than it has been historically, one consequence could be that the central banks would be forced to accept below-target inflation for longer periods of time. This would make it important to try to create acceptance for this among households, companies and market participants, so that these do not start to believe that the central bank has abandoned the inflation target. Expectations among economic agents would thus play a completely central part in this. The problem can be illustrated, in a stylised manner, with the use of Figures 3–5. To maintain the credibility of an inflation target, inflation cannot be allowed to deviate from the target indefinitely. Economic agents can tolerate a deviation in the short term, but, the more time that passes, the closer to target inflation has to be to maintain confidence.