Discussion Paper Details

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Title: On the Weakness of the Swedish Krona

Author(s): Philippe Bacchetta and Pauline Chikhani

Publication Date: November 2020


Programme Area(s): International Macroeconomics and Finance

Abstract: The Swedish krona depreciated sharply between 2013 and early 2020 but standard models are unable to explain this depreciation. This paper reviews the experience of the krona. By estimating an "equilibrium" value for the real exchange rate, we confirm a growing undervaluation after 2014. The depreciation could initially be explained by a decline in interest rates and then by quantitative easing and the Riksbank communication regarding the krona. However, monetary policy cannot explain the extent of the depreciation nor the long depreciation period of seven years. We then review various complementary explanations proposed in the literature including, imperfect information, financial frictions, the role of financial shocks and the convenience yield. Many of these elements can plausibly explain the weakness of the krona, but cannot be quantified.

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Bibliographic Reference

Bacchetta, P and Chikhani, P. 2020. 'On the Weakness of the Swedish Krona'. London, Centre for Economic Policy Research.