Sweden's Riksbank publishes staff memo finding no clear evidence monetary policy works differently in small open economies

The Riksbank has published a staff memo examining how monetary policy affects GDP, unemployment, inflation and exchange rates in ten inflation-targeting small open economies with floating exchange rates. Using a common empirical framework, the study finds that a policy-rate increase typically lowers GDP and inflation, raises unemployment and appreciates the exchange rate, with estimated effects broadly consistent with macroeconomic theory, previous empirical work and estimates for larger economies such as the United States and the euro area. For Sweden, the memo finds relatively strong pass-through from monetary policy to inflation, mainly because of strong links between the real economy, the exchange rate and prices. The exchange rate channel is described as central, with an appreciation of the krona after an interest rate increase clearly contributing to lower inflation. Across countries, differences in inflation and unemployment responses are linked more to transmission elasticities such as the Phillips slope, Okun coefficient and exchange rate pass-through than to differences in GDP or exchange-rate responses alone. The memo also finds that estimated effects on GDP and inflation have been broadly stable over time, while inflation estimates are especially sensitive to the inflation measure and identification method, with short-run zero restrictions producing price puzzles in roughly half of the countries and core inflation measures or sign restrictions largely removing that result.