Thedéen warns: Asset purchases risk market, independence
Erik Thedéen, Governor of the Riksbank, discussed the central bank's high threshold for asset purchases. He highlighted concerns about market functioning and risks to central bank independence.
Taking stock of asset purchases
Riksbank Governor Erik Thedéen used his speech to the Swedish Economics Association to reflect on the central bank's experience with large-scale asset purchases, also known as quantitative easing (QE).
The Riksbank recently finalized the sale of previously purchased securities, returning its balance sheet to a more normal size.
Thedéen distinguished between crisis-driven asset purchases, which are generally less controversial, and those conducted for 'normal' monetary policy purposes during periods of low inflation.
For Sweden, these periods were 2015-2019 and late 2020 to late 2021, aimed at stimulating the economy and bringing inflation to target.
The speech aimed to summarize current knowledge and lessons learned from these experiences.
Neutral rate debate and QE channels
Thedéen noted the ongoing academic debate about the future of the neutral interest rate, which was historically low for years, prompting central banks to resort to QE.
One view suggests the neutral rate has risen post-pandemic and will remain higher, reducing the likelihood of needing QE again.
The opposing view argues that forces pushing rates down remain strong, making a sustained increase uncertain.
Thedéen then outlined QE's theoretical channels: the portfolio balance channel, which aims to lower long-term rates and risk premiums, and the signalling channel, where purchases signal an extended period of expansionary policy, influencing market expectations.
Limited impact, high risks
Empirical research suggests QE has clear effects on financial variables but more uncertain and contingent impacts on GDP and inflation, especially outside of acute crises.
Martin Flodén's analysis for Sweden indicates that while government bond yields fell, the portfolio balance channel did not effectively transmit to covered bond yields, limiting the impact on household and company borrowing costs.
Thedéen concludes that QE works in more limited circumstances than initially thought, carrying risks to market functioning and central bank independence, thus warranting a high threshold for its future use.