IMF Working Papers

Unconventional Monetary Policies in Small Open Economies

By Jesper Lindé, Marcin Kolasa, Stefan Laseen

April 4, 2025

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Format: Chicago

Jesper Lindé, Marcin Kolasa, and Stefan Laseen. "Unconventional Monetary Policies in Small Open Economies", IMF Working Papers 2025, 066 (2025), accessed May 19, 2025, https://doi.org/10.5089/9798229005432.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper provides a comprehensive assessment of the macroeconomic and fiscal impact of unconventional monetary tools in small open economies. Using a DSGE model, we show that the exchange rate plays a critical role to amplify the favourable impact of unconventional monetary policy while it attenuates the effectiveness of conventional fiscal policy to jointly boost output and inflation. We then use the model as a laboratory to do a case study of the Swedish Riksbank asset purchases and negative policy rates 2015-2019. We find that the Riksbank unconventional policy measures provided meaningful macroeconomic stimulus to economic activity and inflation, with the dual benefit of reducing overall government debt by about 5 percent of GDP. If conventional fiscal policy had been used to provide a commensurate output boost, inflation would have risen notably less, and the fiscal cost would have amounted to a deterioration of the government debt position with nearly 8 percent of GDP.

Subject: Bonds, Central bank policy rate, Exchange rates, Financial institutions, Financial services, Foreign exchange, Inflation, Monetary policy, Prices, Unconventional monetary policies

Keywords: Asset purchase, Asset Purchases, Bonds, Central bank policy rate, Exchange rates, Fiscal Policy, Global, Government debt position, IMF working paper 25/66, Inflation, Monetary Policy, Negative Interest Rate Policy, Policy measure, Quantitative Easing, Swedish Riksbank asset purchase, Unconventional monetary policies

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