Central Bank Monetary Policy Analysis

-Guillermo Varela Herrera-

Sveriges Riksbank
The Sveriges Riksbank in one of the most interesting cases balance expansionary
policies to its early reaction to the financial crisis, the methods applied and the
reinitiating of the policies, which surprised the markets in 2015.
Graph 1:
3.5 0.6

M3 (trillions €)
3
M. Base (trillions €, right 0.5
scale)
2.5
0.4

2
0.3
1.5

0.2
1

0.1
0.5

0 0
ene.-05

ene.-12

oct.-13
abr.-10
ago.-05

jul.-08

jul.-15

abr.-17
oct.-06

sep.-09

ago.-12

sep.-16
may.-07
dic.-07

may.-14
dic.-14
mar.-06

jun.-11

mar.-13
nov.-10
feb.-09

feb.-16

Source: Macrobond

From the technical analysis point of view, the first package of measures arrives slightly
late, with a stagnation of the growth of the M3 since December of 2007, as it is seen in
the first tendency line. The initial package of measures, after a string decrease of a 15%
(Federal Reserve bank , 2012) of the GDP due to exports, was focused on a credit
easing, instead of an ordinary QE, due to the elevated importance of the Banking sector
in Sweden. However, this initial response was rather doubtful and didn’t have the
expected response in the M3 as we can see in the considerable decrease during the first
6 months of the plan. The reaction of the Sveriges Riksbank, to this poor performance,
was to decrease the CE policy to a 25% of the initial program but initiated a QE
program as a complement, supposing an overall strong increase in the monetary supply
for nearly a year, that managed to revert, with an initial strong temporal increase and
later permanent increases on the monetary supply, the M3 decreasing tendency, and as
we see in the second tendency line.

The interesting move to analyze is the second policy package realized by the Sveriges
Riksbank, which is the maintenance of the interest rates in 2015 in negative digits (-
0,25%) and the expansion of the bond buying in the QE, which surprised the markets
highly, since the tendency in the M3 was already bullish. The rapid increase of the
monetary supply, that had been reduced considerably establishing itself near to pre-
crisis levels with short modifications of the QE, skyrocketed to the approximated levels
of the first expansionary policy, having a notorious impact on the M3 as we see in the
third tendency line. Apparently the reason for the second package of measures was to
target the non-existing inflation, which had only risen one of the last twelve months.

Finally, analyzing the impact of the measures taken by the Sveriges Riksbank, we can
see in the second graph that the monetary multiplier, as would be expected, decreases
substantially in the injections of money, with, this being a positive note, a near to
complete recovery to the pre-crisis levels after the end of the initial increase of them
Monetary supply in first package of measures. Again, after 2015, the money multiplier a
had a notorious downturn not reaching the previous minimum.
Graph 2

3.5 25
Millions

M3 (trillions €) mm (right scale)

3
20
2.5

15
2

1.5
10

1
5
0.5

0 0
abr.-10

abr.-17
ene.-05

ene.-12

sep.-16
ago.-05

jul.-08
oct.-06

sep.-09

ago.-12

jul.-15
oct.-13
may.-07
dic.-07

may.-14
dic.-14
mar.-06

nov.-10
jun.-11

mar.-13
feb.-09

feb.-16

In terms of the flow of money, in the table one, on the third graph we observe a strong
increase of the ratio of bank reserves over deposits, being this increase the explanation
to the strong decrease of the MM in both of the measures. Accordingly to the behavior
of the MM, the reserves to deposits ratio has had a strong reduction at the end of the
first package of measures, allowing the recovery of the MM which could be used as an
argument that the policy was rather effective and with no major impact in the latter
behavior of none of the variables analyzed.

Comparing this with the first policy, it could be said that the effect of the second
package of measures is being more effective than the first one, assuming positive effects
of both of them. This conclusion is led by the change of tendency caused in the M3,
which appears to be higher even though it has supposed a smaller increase in the M0,
and the lesser alteration on the monetary multiplier and the ratio of reserves.
Graph 3

25 0.25
mm (right scale) C/D R/D

20 0.2

15 0.15

10 0.1

5 0.05

0 0
109
103

115
121
127
133
139
145
151
1
7
13
19
25
31
37
43
49
55
61
67
73
79
85
91
97
 The Federal Reserve
The federal reserve would be the best example of how to implement in time and
correctly the unconventional monetary policies, thorough the 3 quantitative programs
and the twist program (the exchange of short term to long term treasury bonds, with the
intention of convening the same operation as in the first two QE’s without the
inflationary pressure and the inflationary balance tendency that this programs possibly
cause.

In a more detailed analysis, we can see how, the effect of the injections in the monetary
base has maintained the flow of the broad money (accounted by the M2) in a very fine
pacing. Hence, we can see how the injections of capital, thorough the QE’s one, two and
three (since the twist operations have no effect on the monetary base) are initiated just
before the first signs of exhaustion appear in the growth of the M2, with the exception
of an initial downward tendency after the first QE (in 2008). It is remarkable to
mention, the speed of the reaction of the FED in the response to the crisis, initiating the
QE1 just after the unleashing of the financial crisis, starting it in December of 2008.

In addition, is relevant to take into account the maintenance of the monetary mass,
agglomerated in the QEs, with a modest reduction since the beginning of 2015, after
nearly two years of the end of the program9 being this a considerable difference to the
policy followed by the Sveriges Riksbank.

In conclusion we can affirm that the effect of the QE’s has been noticeable positive on
the growth of the broad money in the US, keeping it this way in an upwards tendency.

Graph 4

14.0 4.5
M2 (trillions $) 4.3
13.0 4.0
3.8
12.0 M. Base (trillions $, right scale)
3.5
3.3
11.0 3.0
2.8
10.0 2.5
2.3
9.0 2.0
1.8
8.0 1.5
1.3
7.0 1.0
0.8
6.0 0.5
May-10
May-05

May-06

May-07

May-08

May-09

May-11

May-12

May-13

May-14

May-15

May-16

May-17
Sep-09
Jan-06

Jan-14
Jan-05
Sep-05

Sep-06
Jan-07
Sep-07
Jan-08
Sep-08
Jan-09

Jan-10
Sep-10
Jan-11
Sep-11
Jan-12
Sep-12
Jan-13
Sep-13

Sep-14
Jan-15
Sep-15
Jan-16
Sep-16
Jan-17
Graph 5

14.0 9.5
13.0 8.5
12.0 7.5
11.0 M2 (trillions $)
6.5
10.0
5.5
9.0 mm (right scale)

8.0 4.5

7.0 3.5
6.0 2.5
Oct-06
May-07

May-14
Oct-13
Jul-08

Apr-10

Jul-15

Apr-17
Dec-07

Sep-09

Nov-10

Dec-14
Jan-05
Aug-05
Mar-06

Jun-11
Jan-12
Aug-12
Mar-13

Sep-16
Feb-09

Feb-16
In terms of the transmission of the policy in the creation of banking money, we see that, the
money multiplier has had a very low, and decreasing performance over the period analyzed,
with small recoveries after the second and third QE’s. This implies that even if the FED has
managed to sustain the growth of the broad money the effectiveness of the injections of
currency on the economy have been decreasing and, in absolute terms, relatively low. This
could be used as a criticism to the policy results, since at the end most of the money that is
being injected into the market is having little to no impact.

This problematic can also be seen in graph five, were we can see the effect of the rise on the
reserves to deposits ratio, the main explanation to the decrease of the efficiency of the
expansionary policy, implying that the MFI’s aren’t using the currency to give loans, and
therefore increase broad money, increasing their cash reserves instead.

However, we can see a slight recovery of the monetary multiplier, after the end of the QE3 and
especially after the reduction of the monetary base. This increase would imply a total success
in the recovery form this package of measures, which at the beginning was one of the main
criticisms along with the threat of hyperinflation. However, this initial reverting tendency
between the reserves ratio and the money multiplier is not sufficient, and more data needs to
be recorded in order to affirm the success of the policies in question, since it can be possible
that the former growth on the broad money will disappear with the reduction of the monetary
base.
 0.00
0.03
0.05
0.08
0.10
0.13
0.15
0.18
0.20
0.23
0.25
0.28
0.30

Jan-05
Aug-05
Mar-06
Oct-06
C/D

May-07
Dec-07
Jul-08
Feb-09
Sep-09
R/D

Apr-10
Nov-10
Jun-11
Jan-12
Aug-12
Mar-13
mm (right scale)

Oct-13
May-14
Dec-14
Jul-15
Feb-16
Sep-16
Apr-17
3.5
4.5
5.5
6.5
7.5
8.5
9.5

2.5