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Has the Riksbank Been Reacting to Asset Prices?

Sutherland, Scott LU (2015) NEKN01 20151
Department of Economics
Abstract
This study analyses the interest rate setting policy of the Swedish central bank, the Riksbank. In particular, the paper addresses whether or not the Riksbank reacts to deviations in asset prices from trend levels when setting interest rates. To investigate these issues a modified version of the Taylor rule is used, and is adjusted to reflect an appropriate inflation targeting horizon and augmented with terms accounting for the deviation of asset prices from their trend. Instrumental variables methods of estimation are used to determine which factors most affect interest rate setting, and it is found that forecasted inflation and interest rate smoothing are the significant explanatory variables. Meanwhile, asset price inflation is not a... (More)
This study analyses the interest rate setting policy of the Swedish central bank, the Riksbank. In particular, the paper addresses whether or not the Riksbank reacts to deviations in asset prices from trend levels when setting interest rates. To investigate these issues a modified version of the Taylor rule is used, and is adjusted to reflect an appropriate inflation targeting horizon and augmented with terms accounting for the deviation of asset prices from their trend. Instrumental variables methods of estimation are used to determine which factors most affect interest rate setting, and it is found that forecasted inflation and interest rate smoothing are the significant explanatory variables. Meanwhile, asset price inflation is not a significant determinant of the interest rate. This indicates that the Riksbank has not reacted to asset prices and that it is highly unlikely that the Riksbank any time soon will reverse its current expansionary policies and raise interest rates substantially enough to try to deal with potential bubbles or financial imbalances. The implication for the current policy debate is therefore that policy tools other than monetary policy need to be used to handle financial imbalances, and that other institutions than the Riksbank should act to implement these. (Less)
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author
Sutherland, Scott LU
supervisor
organization
course
NEKN01 20151
year
type
H1 - Master's Degree (One Year)
subject
language
English
id
7364072
date added to LUP
2015-06-30 10:54:25
date last changed
2015-06-30 10:54:25
@misc{7364072,
  abstract     = {This study analyses the interest rate setting policy of the Swedish central bank, the Riksbank. In particular, the paper addresses whether or not the Riksbank reacts to deviations in asset prices from trend levels when setting interest rates. To investigate these issues a modified version of the Taylor rule is used, and is adjusted to reflect an appropriate inflation targeting horizon and augmented with terms accounting for the deviation of asset prices from their trend. Instrumental variables methods of estimation are used to determine which factors most affect interest rate setting, and it is found that forecasted inflation and interest rate smoothing are the significant explanatory variables. Meanwhile, asset price inflation is not a significant determinant of the interest rate. This indicates that the Riksbank has not reacted to asset prices and that it is highly unlikely that the Riksbank any time soon will reverse its current expansionary policies and raise interest rates substantially enough to try to deal with potential bubbles or financial imbalances. The implication for the current policy debate is therefore that policy tools other than monetary policy need to be used to handle financial imbalances, and that other institutions than the Riksbank should act to implement these.},
  author       = {Sutherland, Scott},
  language     = {eng},
  note         = {Student Paper},
  title        = {Has the Riksbank Been Reacting to Asset Prices?},
  year         = {2015},
}