6 [16]  Other arguments for a large bond holding The arguments for large bond holdings in normal circumstances that I have so far discussed seem not to be particularly relevant to the Riksbank’s monetary policy in a future normal situation. Another argument put forward by some is that a large bond holding, and thereby a larger liquidity surplus in the economy, may strengthen the monetary policy transmission mechanism. 16 The arguments basically say that a liquidity surplus – when the banking system has plenty of central bank reserves – can mitigate the risk of frictions on the money market. During the financial crisis, the interbank market functioned poorly, causing market rates to become more volatile and making it more difficult for financial institutions with no direct access to central bank facilities to get access to liquidity. With a large liquidity surplus, the economy becomes less dependent on a well-functioning interbank market. Regardless of the soundness of these arguments, they have no implications for the Riksbank’s bond holdings. The fact is that the liquidity surplus in Sweden will, in all likelihood, be large irrespective of how the bond portfolio develops in the future. We already had a structural liquidity surplus in the economy before the Riksbank began its bond purchases in 2015, and the surplus has increased since then as a result of reduced cash use and the Riksbank’s dividend payments. The Riksbank’s bond holdings now amount to SEK 363 billion while the liquidity surplus, i.e.
This background is important in order to be able to assess how the Riksbank’s balance sheet should develop over the longer term and be able to relate to the discussion in other countries. Central bank balance sheets were quite different prior to the financial crisis, both in composition and size. We can expect countries in which monetary policy steers towards similar future inflation targets to have comparable interest rate levels. The balance sheets may, however, look quite different. My main message today is that the monetary policy arguments for a large balance sheet are, in my opinion, not particularly strong in the Swedish context. Indeed, there are also risks associated with maintaining a large balance sheet. The most likely scenario is therefore that the Riksbank’s balance sheet will, in a future normal situation, be substantially smaller than it is today. There is no “normal” balance sheet Figure 2 shows what various central bank balance sheets looked like just over a decade ago, prior to the global financial crisis. The most striking feature of the figure is that balance sheets looked different in different countries. In some countries, for example the United States and Canada, the central bank had a lean balance sheet, the size of which was determined in practice by the demand for banknotes in the economy. The asset side was dominated by domestic government bonds while the liability side was dominated by issued banknotes.