Today I intend to primarily focus on the relationship between monetary policy and competitiveness. Let me first of all state that the Riksbank has no responsibility for competition issues – our responsibility is monetary policy – and our most important instrument, the repo rate, does not affect competitive conditions on the different markets. However, changes in competitive conditions can have significance for price trends on certain sub-markets. From textbook to reality If there were perfect competition and total information, conditions that only prevail in university textbooks, market prices would be determined by companies’ marginal costs. As there is competition between a large number of producers on every market, no company has any power over pricing and all consumers meet the same prices. On a market characterised by perfect competition, more companies would establish themselves as long as the prices exceeded the marginal costs and they could make a profit. As there would be no entry barriers in this simplified, but pedagogical textbook world, and no lack of skilled entrepreneurs, the profits of all companies would be zero when the market was in balance. In a market with perfect competition, the impact of a cost change (possibly resulting from a weaker exchange rate or a rise in the rate of wage increase) would be total, as the price is set as equal to the marginal cost. Reality is, of course, rather different.
And they are typically much less leveraged. But increasingly they do offer a liquidity promise – that the investors can redeem the value of their investment at very short notice. In this way they can create liquidity mismatches when investors in funds are offered a greater degree of access to investment than is consistent with the ease with which the assets in which they are invested can be sold without a big impact on price. A particular concern occupying both the FPC and authorities internationally is that simultaneous redemptions from open-ended funds offering short-term redemptions could test the resilience of market liquidity, with wider adverse effects through mark-to-market pricing and collateral calls. This risk has increased due to the growing importance of open ended mutual funds. As described in the FPC’s July 2015 Financial Stability Report, global assets under management have grown significantly over the past decade, to around $ trillion. Within that, the share of funds typically offering investors near-term redemptions such as open ended mutual funds has increased, from just below 40% a decade ago to approaching half. This could give rise to particular risks where a liquidity promise offered by a fund gets too out of line with the liquidity characteristics of the assets the fund holds. Corporate bond funds could be relevant here. These funds have more than doubled in size over the last 10 years, from $ trillion to almost $ trillion AUM.