Spillover Effect on Swedish Inflation : How ECBs interest rate changes effect Swedish inflation

Abstract: There is a limited amount of literature regarding spillover effects on inflation. The previous literature is focused on a small number of countries, and on shocks coming from demand and supply. The objective of this thesis is to investigate how a change in the European Central Bank (ECB) policy rate affects Swedish inflation in the short and long run. To this end, this thesisestimates a cointegrated vector autoregressive (CVAR) model using data for the period from 2000 to 2022. The results show that a change in the ECB rate does not have statistically significant effect on the Swedish inflation in the short run, but has statistically significant effect in the long run. The long run results do also show that an increase in the ECB rate have a positive effect on the Swedish central bank’s policy rate.