I will take a longer perspective and discuss which tools the Riksbank may need to use, especially if the low interest rate scenario that has characterised the past 10 years becomes even more prolonged. The fact that monetary policy measures affect a central bank’s balance sheet has become increasingly common in large parts of the world. This development has been driven by the very low interest rates and the need to make monetary policy even more expansionary. Essentially, it is nothing new – if we go back in time, there are many examples of central banks that have used variation in their asset portfolios as a means of conducting monetary policy. The monetary policy toolbox also needs to take into account changes in the financial system; for instance, we in 1 [25] ---------------------------*This speech grew out of many long discussions held over the spring of 2020. The opinions expressed are my own. At the same time, I would like to thank David Vestin for his help in writing this speech and Petra Frid for her help with the diagrams. I would also like to thank Mattias Erlandsson, Jesper Hansson, Pernilla Meyersson, Ulf Söderström, Anders Vredin, Frida Fallan, Charlotta Edler, Ann-Leena Mikiver, Cecilia Roos-Isaksson and Marianne Sterner for their valuable comments on the speech and Elizabeth Nilsson, Calum McDonald and Gary Watson for their assistance translating it into English. Sweden have, in recent years, seen a development towards a higher share of market financing for Swedish companies.
Such a communication would be reminiscent of the reverse situation, when the central bank is concerned about fiscal dominance – a situation where an unsustainable fiscal policy makes it impossible for the central bank to restrain inflation – and communicates this. 16 Personally, I do not think that an independent monetary policy presumes a total lack of dialogue between the Riksbank and the political system on such matters. The second question concerns the effectiveness of various measures and the risks they entail. For example, assume that the Riksbank can make monetary policy more expansionary by purchasing certain financial assets. This could increase the risks on the Riksbank’s balance sheet considerably and lead to future losses for taxpayers. Assume now that it had been possible to achieve an equivalent effect by means of mild fiscal policy stimulation measures. This would probably be possible in a situation where monetary policy is at its lower bound. The Riksbank would then not have to raise the interest rate as economic activity rises and fiscal policy would thereby become more effective than normal. 17 In this case, there should be conditions for holding a discussion over which policy mix would be most appropriate. In addition, Blanchard (2019) makes the point that, if the real interest rate is lower than the growth rate in the economy, the cost for debt-financed public investments will be very low.