Despite heavy monetary policy stimulation, inflation is far below target in many countries and the recovery from the global financial crisis is still going slowly in most places after seven or eight years. A number of central banks have been forced to switch to conducting monetary policy by other means than policy rate adjustments, as this rate has now been cut as far as is deemed possible. Monetary policy seems to have lost its magic touch, at least for the time being. Today, I intend to describe a few reasons for why it has become more difficult to conduct monetary policy than in the period prior to the global financial crisis. I also intend to describe which further tools monetary policy decision-makers will need to consider if these difficulties persist. In between, I also intend to give my view on how much room for manoeuvre a small country has to deviate from developments in large countries and their monetary policy. Low global level of interest rates In recent decades, the level of interest rates has shown a falling trend, both in Sweden and internationally (see Figure 1). Long-term real interest rates, which is to say nominal interest rates minus inflation, have fallen by about 4.5 percentage points around the world over the past 30 years. The reasons for the downturn are not fully understood.
This also applies to the temporarily restricted autonomy and flexibility when a central bank must act resolutely in certain situations to maintain confidence in the inflation target. So far, it is my assessment that this is something transitory. Different theories behind the weak recovery from the financial crisis One notable theory for the reasons behind the low interest rates and the sluggish recovery from the financial crisis is the hypothesis of secular stagnation advanced by Summers (2013). The concept here is that a chronic surplus of saving has arisen in the world for various reasons, and that this has pushed the interest rate down. The problem, however, is that not even the current low level of interest rates creates a balance between supply and demand. The result of this is the risk that many countries will become stuck in a situation with too low aggregate demand, resource utilisation below normal and inflation that tends to be much too low. Rogoff (2015) instead argues that growth is being restrained by the world being in an adjustment phase of an unusually large debt cycle, a “debt supercycle”. Even if the level of interest rates is unusually low, this needs not mean that countries are stuck in a situation of chronic demand deficit. Demand and growth will start to pick up when the debt situation again normalises. Unlike a case of secular stagnation, which can be regarded as a structural phenomenon, the problems are thus assumed to be of a basically cyclical, albeit long-term, nature.