Unconventional Monetary Policies in Small Open Economies

Unconventional Monetary Policies in Small Open Economies
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Volume/Issue: Volume 2025 Issue 066
Publication date: April 2025
ISBN: 9798229005432
$20.00
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Topics covered in this book

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Banks and Banking , Inflation , Economics- Macroeconomics , Money and Monetary Policy , Public Finance , Monetary Policy , Asset Purchases , Quantitative Easing , Negative Interest Rate Policy , Fiscal Policy , Exchange rates , Inflation , Sovereign bonds , Bonds , Central bank policy rate , Fiscal stimulus , Unconventional monetary policies , Real exchange rates

Summary

This paper provides a comprehensive assessment of the macroeconomic and fiscal impact of unconventional monetary tools in small open economies. Using a DSGE model, we show that the exchange rate plays a critical role to amplify the favourable impact of unconventional monetary policy while it attenuates the effectiveness of conventional fiscal policy to jointly boost output and inflation. We then use the model as a laboratory to do a case study of the Swedish Riksbank asset purchases and negative policy rates 2015-2019. We find that the Riksbank unconventional policy measures provided meaningful macroeconomic stimulus to economic activity and inflation, with the dual benefit of reducing overall government debt by about 5 percent of GDP. If conventional fiscal policy had been used to provide a commensurate output boost, inflation would have risen notably less, and the fiscal cost would have amounted to a deterioration of the government debt position with nearly 8 percent of GDP.