High Frequency Identification of Monetary Policy Shocks in Sweden
|Author:||Mgr. Erik Němčík|
|Year:||2022 - winter|
|Leaders:|| PhDr. Jaromír Baxa Ph.D.
|Work type:|| Finance, Financial Markets and Banking
|Awards and prizes:||Deloitte Outstanding Thesis Award.|
|Abstract:||Current effectiveness and functioning of one of the key instruments of monetary policy,
the interest rate, has been debated around the world with an increasing intensity.
Sweden, specifically, characterized by a recent low inflation period coupled with an
experimental approach to monetary policy (utilizing both negative interest rates and
quantitative easing) presents a peculiar case of interest.
This thesis presents new evidence on the monetary policy transmission in Sweden
during the low inflation period. To convey this, it utilizes the Proxy-SVAR method,
where data from financial markets are used to identify monetary policy shocks and
their propagation through the financial and macroeconomic variables. In particular,
STINA-swaps are used as an instrumental variable in our main model of interest.
The results strongly suggest dampened effectiveness of the repo rate, the Riksbank’s
main interest rate tool, in achieving the inflation target over the past decades. Price
puzzle is present in all model variations applied and hence hints at the inability of the
Swedish central bank to effectively control inflation via interest rate decisions. It is
important to state that the results are robust to multiple econometric specifications,
different inflation setups or estimation methods. Furthermore, the thesis suggests that
monetary policy shocks negatively affect important economic variables, such as
unemployment or industrial production, and contract the credit channel through
increases in corporate spread. Evidence on the negative relationship between the
monetary policy shocks and the financial market, proxied via the OMX index, is
presented as well.