How does Monetary Policy Affect the Inflation Rate? A Study of the Riksbank's Monetary Policy from 2000-2019

Abstract: This thesis examines how the Riksbank’s monetary policy has affected the Swedish CPI inflation rate from 2000 to 2019. This thesis aims to determine if monetary policy is effective at controlling inflation. There is an emphasis on exploring the differences between conventional and unconventional monetary policy. A multiple linear regression model is used to test the relationship between inflation and monetary policy. The model also tests the relationship between inflation and an array of other factors such as trade openness, GDP growth and unemployment. The results indicate that monetary policy has a large impact on the domestic inflation rate, but other factors such as trade openness and energy prices have a considerable effect as well. The results on unconventional monetary policy suggest that neither negative interest rates nor purchases of bonds are as effective as initially anticipated. The conclusions suggest that conventional monetary policies are more effective than unconventional methods. Small open economies, like Sweden must also consider the effects of being open to trade and how that may weaken domestic monetary policies.