10  Alsterlind et al. (2015) describe the signalling and portfolio balance channels in more detail. 11  12  In Sweden, the effect on rates with short maturities is probably more important than the effect on rates with long maturities. This is because most lending to household and  15 [16]  companies is done at variable interest rates. According to Statistics Sweden’s Financial Market Statistics, 73 per cent of lending to households and non-financial corporations had a remaining interest-rate fixation period of 3 months or less in February 2018. The primary purpose of repo rate forecasts has so far been to influence market rates, and periodically there have been major differences between the Riksbank’s forecasts and market expectations (see Sveriges Riksbank 2017b). 13  14  See Sveriges Riksbank (2012). 15  See Rachel and Smith (2015) and Holston et al. (2017). See, for instance, Duffie and Krishnamurthy (2016), Bernanke (2016) and Constancio (2017). 16  The Riksbank could reduce the liquidity surplus further by selling other assets, i.e. gold and foreign exchange reserves. But such a change of its asset holdings is not likely; the Riksbank has in the last decade instead enhanced its foreign exchange reserves by more than SEK 200 billion financed by loans in foreign currency. 17  18  See Greenwood et al. (2016), Constancio (2017) and Krishnamurthy (2018). This is still a simplified description of the Riksbank’s operational framework. See the references in footnote 6 for a more complete description.
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.