21 One can see that international interest rates are very important to Sweden if one studies longer time series of international real rates. Figure 2 shows long real interest rates for a number of developed countries. It is clear that large movements in real interest rates are common to most developed countries, even if the smaller cyclical fluctuations can vary in different countries. One also sees that the degree of covariation has increased over time, as the financial markets have become increasingly integrated and globalised. This is also something confirmed by more formal analysis. 22.It is also striking that real interest rates have shown a declining trend in recent decades and are currently around zero. 23 At the end of the  18  This is also confirmed by more formal studies, see for instance Lindé, J., “Swedish Postwar Business Cycles: Generated Abroad or at Home?” Scandinavian Journal of Economics no. 4, 2004. 19  Robert Mundell was awarded the economics prize in 1999 for this analysis and theory on optimal currency areas. Marcus Fleming, who also contributed to developing a similar intellectual framework for stabilisation policy in open economies, died in 1976 and was therefore not available to receive a prize. 20  This also leads to a strengthening of the real exchange rate, as price levels are assumed to be constant. 21  See, for instance, “Account of monetary policy in 2014”, page 37, the section “Policy rate differences, the exchange rate and inflation”, Sveriges Riksbank.
If monetary policy were to need to be more expansionary we can extend the purchases of government bonds, or cut the repo rate further and lower the repo-rate path. We also have the possibility of introducing a programme of loans aimed at companies similar to the ECB’s TLTRO or the Bank of England’s “Funding for Lending Scheme”. Moreover, we can intervene on the foreign exchange market. How do complementary monetary policy measures work? Regardless of which measure one chooses, the effects of complementary monetary policy can be divided into two main lines; one is that they contribute to reducing interest rates in general and the other that they increase the amount of money in the economy. The purchases of government bonds reduce the supply available in the market, which leads to an increase in the price and a decrease in the yield. When government bond yields fall, investors find it more attractive to seek higher-risk assets, which pushes down interest rates and raises prices there, too. This is usually called the portfolio balance channel. When the price of the assets rises, the wealth of those who own the assets also increases, which contributes to stimulating consumption and investment. More liquidity among the banks may also lead to increased lending. All in all, complementary monetary policy thus functions in roughly the same way as normal repo-rate cuts.