What testifies reliability of the central bank of Sweden – Riksbank?
The Riksbank is the central bank of Sweden and acts as a public authority which is controlled by the Swedish Parliament. The price stability and the monetary policy of Sweden are managed by the Riksbank. One of the many aims of the central bank is to promote a secure and effective payments system. Sweden is considered one of the countries with the greatest and fastest recoveries after the financial crisis, and the key measure is thought to be their forceful and bold use of the monetary policy. As evident from Figure 1(a) the interest rate fell from 4.25 in October 2008 to just 0.25 in October of 2009. The average inflation of Sweden by the CPI index was clearly affected by the changes in interest rates since the inflation rate went from 3.44% in 2008, to a negative 0.48% in 2009, to a 1.16% in 2010. The non-immediate rise in inflation can be primarily explained by the time lag of the monetary policy. Nevertheless, the Riksbank’s policy helped the country avoid successfully a deflationary spiral.
By a closer examination of the use of the monetary policy by the Riksbank during those times, we can observe in Figure 2(a) how the various changes in interest rate affected inflation. This is shown by the IS-LM-PC model which is illustrated. The decrease of the repo rate by the central bank resulted in a downward shift of the LM curve, from LM to LM1. The IS curve remained constant. Then we can see the effect of the downward shift, by the change in the equilibrium point from A to A’ and an increase in output from Y to Yn.