The impact of Swedish monetary policy: Is the Swedish Riksbank losing control over consumer price inflation?

Abstract: Monetary policy has been suggested to show a fading impact on domestic inflation. Based on this, the study tests whether this has occurred with Swedish monetary policy over the period January 2000 – January 2020. This is done by studying the impact of monetary policy on consumer price inflation and real estate prices in Sweden, comparing the results to the United States. The used method consists of local projections for computing the impact of monetary policy shocks on the economy. Furthermore, the measure of monetary policy shocks is developed by using the measure constructed by Romer & Romer (2004). The results for Swedish consumer price inflation support the general findings of the literature, asserting that the impact of domestic monetary policy on domestic consumer price inflation has decreased. However, the responses of U.S. consumer price inflation differ. The impact on changes in both Swedish and U.S. real estate prices is less clear. There is a potential presence of a Cantillon Effect in the developments of the responses of consumer price inflation and real estate prices. Yet, the unclear findings for real estate prices reduce the effect's feasibility as an explanatory factor.