In the monetary sphere, that takes the form of purchases from the private sector of longer-term public and private securities, financed by issuing claims on the central bank. As we saw in Charts 1 and 2, both the Bank of England and the US Federal Reserve have made substantial large-scale asset purchases, worth about 15% of GDP in each case. The aim of such purchases is to drive down the yields on these and similar assets by increasing their scarcity, so boosting demand. Commonly referred to as “quantitative easing”, the moniker is somewhat misleading as it focuses attention on the associated reserve expansion, rather than the change in the portfolio composition of the central bank and private sector. But do they work? Under Ricardian equivalence the answer would be No, as the associated transfer of risks from private sector balance sheets onto the public sector’s is matched by offsetting movements in future taxes (Gauti Eggertson and Woodford, 2003). Be that as it may, event studies by Joe Gagnon and others (2010) for the United States, and Mike Joyce and others (2010) for the United Kingdom suggest that long-term bond rates in each jurisdiction fell by around 100 basis points as a result of the purchase programmes, though the ultimate impact on aggregate demand is harder to judge. From this I draw my fourth lesson: central banks do not run out of ammunition when policy rates reach their zero lower bound.
One source of concern for both the United States and the world as a whole is the large deficits in the US economy. In the third quarter last year the current account deficit totalled USD 165 billion, or around 6 per cent of GDP. Data for November show that the deficit has continued to grow, reaching a new record high of just over USD 60 billion. This may result in changes in interest rates and exchange rates that could have considerable consequences for world trade. A large share, or about 40 per cent, of Sweden’s exports go to the euro area, and as a result economic developments there are especially important for us. The recovery in the euro area economy is going slowly. Growth in the third quarter was lower than expected. Available indicators for the fourth quarter provide a mixed picture. Germany, which is an important market for Swedish products, is showing some signs of an improvement. After several years of extensive cutbacks there should be a pent-up need among firms to invest. At the same time exports are being dampened by the euro’s rise against mainly the dollar. BIS Review 10/2005  1  The economic situation in Sweden As regards Sweden the Riksbank has been positive in the past year in its outlook on economic developments. International demand has increased faster than anticipated, with above all exports of services proving unexpectedly robust. Economic policy is also contributing to the relatively bright growth prospects.