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.
I maintain that all the measures taken during the pandemic include elements of both monetary policy and financial stability. Sweden has been a member of the EU for a long time and, like other Swedish authorities, the Riksbank must somehow relate to what happens and what applies in the EU. Other central banks in the EU have the right to far-reaching purchases of various securities for monetary policy purposes. It would therefore be strange to have national legislation giving the Riksbank a markedly different toolbox to what could be argued is the standard in the EU. In addition, the Inquiry’s proposals mean that certain measures may only be adopted under extraordinary circumstances. Such proposals are in sharp contrast to the flexibility central banks have needed to show over the last ten–fifteen years to manage shocks that few could have predicted. One critical issue concerns how much we believe (or fear) that the balance sheet will also have to be used under more normal circumstances in the period ahead. As I am one of those who believes there is a great probability that this will be the case, and who does not see the point of giving monetary policy a narrower interpretation than has been normal from a historical perspective, I do not consider it reasonable to introduce the type of restrictions that the Inquiry advocates. Accessible foreign exchange reserves provide security in crises As regards the matter of an appropriate size for the foreign exchange reserves, I have two comments.