TIME-SERIES ANALYSIS OF SWEDISH CENTRAL BANK’S INTEREST RATE OPERATION RULE

This paper estimates a forward-looking Taylor-type interest rate reaction function for Swedish central bank’s inflation-targeting policy and a developed model with the exchange rate taken into account. Based on real-time quarterly macroeconomic time-series from Sweden in the first decade of this century, The evidence suggests that the Swedish central bank, Sveriges Riksbank, was not merely adjusting its repo rate in response to the changes in expected inflation and output deviations. An approach that is known as one of a central bank’s classic regulation tools to deal with domestic inflation first proposed by economist John Taylor. The results show that the targeted exchange rate could be Sveriges Riksbank’s third policy concern in real practice, though in an extraordinarily implicit way. Swedish central bank’s underlying emphasis upon exchange rate stability may shed light on why the inflation record of Sweden in the recent years missed its monetary policy objective. However, the argument that unyielding exercise of the classic Taylor Rule would enhance policy effectiveness in a small open country like Sweden remains in question.