## Unconventional Monetary Policies in Small Open Economies

_IMF Working Papers, April 4, 2025_

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**Canonical URL:** [Unconventional Monetary Policies in Small Open Economies](https://www.imf.org/en/publications/wp/issues/2025/04/04/unconventional-monetary-policies-in-small-open-economies-565820)

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## Bibliographic details
- Authors: Jesper Lindé, Marcin Kolasa, Stefan Laseen
- Published: April 4, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229005432.001

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### Summary
- The paper provides a comprehensive assessment of the macroeconomic and fiscal impact of unconventional monetary tools in small open economies.
- A DSGE model is used to examine mechanisms and to conduct a case study of the Swedish Riksbank asset purchases and negative policy rates during 2015-2019.
- Key qualitative conclusion: the exchange rate plays a critical role in amplifying the favourable impact of unconventional monetary policy and attenuating the effectiveness of conventional fiscal policy to jointly boost output and inflation.

### Model and methodology
- Framework: DSGE model calibrated for small open economies to evaluate macroeconomic and fiscal effects of unconventional monetary tools.
- Purpose: Identify transmission channels (with emphasis on the exchange rate) and compare unconventional monetary policy versus conventional fiscal policy in their joint effects on output and inflation.

### Case study: Swedish Riksbank, 2015-2019
- Application: The model is used as a laboratory to simulate and assess the Swedish Riksbank asset purchases and negative policy rates implemented in 2015-2019.
- Outcome: The Riksbank unconventional policy measures provided meaningful macroeconomic stimulus to economic activity and inflation.

### Key quantitative results
- Government debt effects:
  - Unconventional monetary policy (Riksbank measures) reduced overall government debt by about 5 percent of GDP.
  - A commensurate output boost achieved instead by conventional fiscal policy would have produced a fiscal cost resulting in a deterioration of the government debt position with nearly 8 percent of GDP.
- Inflation and output:
  - If conventional fiscal policy had been used to provide a commensurate output boost, inflation would have risen notably less than under the Riksbank unconventional policy measures.

### Policy implications and recommendations
- For small open economies, unconventional monetary policies that affect the exchange rate can deliver stronger joint gains in output and inflation than equivalent conventional fiscal expansions.
- Policymakers should account for exchange rate amplification when choosing between unconventional monetary tools and fiscal measures to stimulate demand.
- Fiscal authorities should weigh the larger fiscal cost (nearly 8 percent of GDP deterioration in the case study) of using conventional fiscal policy to mimic the output effects of unconventional monetary measures.

*Source: https://www.imf.org/en/publications/wp/issues/2025/04/04/unconventional-monetary-policies-in-small-open-economies-565820*

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_Source: https://www.imf.org/en/publications/wp/issues/2025/04/04/unconventional-monetary-policies-in-small-open-economies-565820_