Paola Di Casola | European Central Bank (ECB)
Pär Stockhammar | Sveriges Riksbank


Quantitative Easing , international spillovers , financial transmission channels , small open economy , Bayesian VAR models

JEL Codes:

E44 , E52 , F40 , G10

What are the effects and transmission channels of asset purchase programs conducted simultaneously locally and abroad on a small open economy? This question is particularly relevant in the current situation, when the recovery after the pandemic might require major central banks around the world to consider a normalization of monetary policy and small open economies may be affected both by the foreign and domestic quantitative tightening. Studying the case of Sweden, we find that the Riksbank QE raised GDP, lowered unemployment and depreciated the local currency, while effects on inflation are less clear. The ECB QE had large positive spillover effects on both GDP and inflation in Sweden and induced an endogenous response of the domestic QE program. The domestic QE worked through improved lending conditions for households and lower expected future rates, while the foreign QE improved financing conditions for firms.

1. Introduction

The Covid-19 pandemic induced many central banks around the world to intervene to help the functioning of the financial markets and cut their interest rates close to the effective lower bound to stimulate the economy. With the pandemic, unconventional monetary policy tools, such as large-scale asset purchases, were used contemporaneously by many central banks. Despite a large literature on the macroeconomic effects of quantitative easing (QE) programmes (Borio and Zabai, 2016, Bhattarai and Neely, Forthcoming, Dell’Ariccia et al., 2018, Kuttner, 2018 and BIS, 2019), there is still limited knowledge on the effects and distinctive transmission mechanisms of domestic and foreign QE programmes in small open economies.

In Di Casola and Stockhammar (2021) we use the case of Sweden and study the effect of the Quantitative Easing (QE) programmes conducted by Sveriges Riksbank and the ECB during the period 2015-2018, highlighting the different financial transmission channels.2 Sweden is a small open economy strongly affected by shocks originating from its main trading partners, such as the euro area (Corbo and Di Casola, 2022). Moreover, interest rates in Sweden were cut into negative territory during the period the Riksbank purchased government bonds. Hence, QE was conducted at the same time as conventional monetary policy.

2. Methodology

In order to address the specific features of the Swedish QE programme, we use a structural BVAR model with two identification schemes, inspired by Weale and Wieladek (2016), which we extend to account for foreign QE, the exchange rate channel and the contemporaneous conventional monetary policy carried out in Sweden. One identification strategy (identification I) relies on zero short-run restrictions, while one relies on short-run zero and sign restrictions (identification II). In both cases, no assumptions are made on the sign of the effect of domestic and foreign QE shocks on Swedish output and prices. The main benefit of this approach is the use of the cumulative announcement of purchases by the ECB and the Riksbank, scaled by GDP, as proxy for QE, thereby allowing for the effects of QE announcements in a BVAR model. The distinction of the two types of QE shocks relies on the assumption that the Swedish QE programme was determined both by Swedish economic conditions and the ECB QE programme – in line with the assumption that Sweden is a small open economy.

3. Results

Figure 1.
Impulse response functions to ECB QE shock (left) and Riksbank QE shock (right)
Note: Results refer to Identification I (blue and black lines) and Identification II (red lines). Sample period is 2015:01-2018:12. Responses are in percentage terms. The solid lines represent the median response. The dashed lines denote a 68 percent credible interval.

We find that the Riksbank QE shock had expansionary effects on the real economy, both in terms of output and unemployment, while the effects on prices are less clear, even though the Swedish krona weakened in real terms in response to QE (Figure 1). Using the scaling of purchases over GDP, the effects on output are comparable to the effects found in the VAR literature for the US, the euro area and UK (see Table A1 in Appendix). At the same time, the ECB QE shock had expansionary effects both on output and inflation in Sweden, despite the Swedish krona strengthening on impact (Figure 1). Following the ECB QE shock, inflation expectations and households’ confidence increased in Sweden. These effects are comparable to the effects found in the VAR literature for the ECB QE on the euro area (see Table A1 in Appendix). The positive spillover effects are partly due to the response of the Swedish asset purchase programme to the ECB’s programme, that limited the appreciation of the real exchange rate. The larger effect of foreign QE rather than domestic QE on Swedish inflation seems to be driven also by energy prices, in line with studies of spillover effects of ECB monetary policy, that turns out to affect non-oil commodity prices globally (Ca’ Zorzi et al., 2020).

We find evidence of the exchange rate channel of QE and low exchange rate pass-through. Regarding the signalling channel, the Riksbank QE lowered the interest rate expectations six months, two and five years ahead, unlike the ECB QE. There is also evidence of the portfolio balance channel for both the domestic and foreign QE, but in different ways. The domestic QE shock improved the domestic financing conditions more than the ECB QE shock. The ECB QE transmitted through a drop in risk premia, for both corporate and mortgage bonds in Sweden. These results are consistent with the large role of funding in global financial markets of Swedish banks and firms (Gustafsson and von Brömsen, 2021).3 The Riksbank QE shock raised stock prices and housing prices, and lowered the term spread.

Few papers in the literature discuss the spillovers of foreign QE for a small open economy. Examples of empirical studies on the spillovers of the ECB’s asset purchase programmes are Bluwstein and Canova (2016), Chen et al. (2017), Moder (2019) and Kolasa and Wesolowski (2020). To the best of our knowledge, our paper is the first one to evaluate the different effects and transmission channels on a small open economy of domestic and foreign QE programs conducted at the same time.

4. Conclusions

The main contribution of our work to the current policy debate is the importance of evaluating the role of spillovers of foreign unconventional monetary policy for small open economies and the response of the central banks of those economies with their domestic unconventional monetary policy. This question is particularly relevant in the current situation, when the recovery after the pandemic might require major central banks around the world to consider a normalization of monetary policy and small open economies may be affected both by the foreign and domestic quantitative tightening.


Table A1. Standardized effects of QE programmes

Note: Results for Sweden come from baseline model with Identification I (with short-run zero restrictions) and Identification II (with short-run zero and sign restrictions), standardized to one percent of GDP of the correspective economy. * refers only to results for Sweden and indicates that at the time of the effect the 68 percent credible intervals are excluding zero. Data for UK, USA and euro area from Fabo et. al. (2021), average values from 48 studies. Effects in percentage terms.


Alpanda, Sami and Serdar Kabaca, “International Spillovers of Large-Scale Asset Purchases,” Journal of the European Economic Association, 2020, 18 (1), 342–391.

Bhattarai, Saroj and Christopher J. Neely, “An Analysis of the Literature on International Unconventional Monetary Policy,” Journal of Economic Literature, Forthcoming.

Bluwstein, Kristina and Fabio Canova, “Beggar-Thy-Neighbor? The International Effects of ECB Unconventional Monetary Policy Measures,” International Journal of Central Banking, September 2016, 12 (3), 69–120.

Borio, Claudio and Anna Zabai, “Unconventional monetary policies: a reappraisal,” BIS Working Papers 570, Bank for International Settlements, July 2016.

Ca’ Zorzi, Michele, Luca Dedola, Georgios Georgiadis, Marek Jarocinski, Livio Stracca, and Georg Strasser, “Monetary policy and its transmission in a globalised world,” Working Paper Series 2407, European Central Bank, May 2020.

Chen, Qianying, Marco Lombardi, Alex Ross, and Feng Zhu, “Global impact of US and euro area unconventional monetary policies: a comparison,” BIS Working Papers 610, Bank for International Settlements, January 2017.

Corbo, Vesna and Paola Di Casola, “Drivers of consumer prices and exchange rates in small open economies,” Journal of International Money and Finance, April 2022.

Dell’Ariccia, Giovanni, Pau Rabanal, and Damiano Sandri, “Unconventional Monetary Policies in the Euro Area, Japan, and the United Kingdom,” Journal of Economic Perspectives, 2018, 32 (4), 147–172.

De Rezende, Rafael B. and Annukka Ristiniemi, “A shadow rate without a lower bound constraint,” Bank of England working papers 864, Bank of England, May 2020.

Di Casola, Paola & Stockhammar, Pär, 2021. “When domestic and foreign QE overlap: evidence from Sweden,” Working Paper Series 404, Sveriges Riksbank. Latest version here.

Fabo, Brian, Martina Jancokova, Elisabeth Kempf, and Lubos Pastor, “Fifty shades of QE: Comparing findings of central bankers and academics,” Journal of Monetary Economics, 2021, 120, 1–20.

Gustafsson, Peter and Tommy von Brömsen, “Coronavirus pandemic: The Riksbank’s measures and financial developments during spring and summer 2020,” Economic Review 2021:1, Sveriges Riksbank 2021.

Kolasa, Marcin and Grzegorz Wesolowski, “International spillovers of quantitative easing,” Journal of International Economics, 2020, 126.

Kuttner, Kenneth N., “Outside the Box: Unconventional Monetary Policy in the Great Recession and Beyond,” Journal of Economic Perspectives, November 2018, 32 (4), 121–46.

Moder, Isabella, “Spillovers from the ECB’s Non-standard Monetary Policy Measures on Southeastern Europe,” International Journal of Central Banking, October 2019, 15 (4), 127–163.

Weale, Martin and Tomasz Wieladek, “What are the macroeconomic effects of asset purchases?,” Journal of Monetary Economics, 2016, 79 (C), 81–93.

  • 1.
    Part of the work was conducted when Paola Di Casola was affiliated with Sveriges Riksbank.
    This policy brief should not be reported as representing the views of Sveriges Riksbank or the European Central Bank. The views expressed are those of the authors and do not necessarily reflect those of the Riksbank, ECB or the Eurosystem.
  • 2.

    De Rezende and Ristiniemi (2020) is another paper studying the effects of the Riksbank’s 2015-2017 QE programme on the macroeconomy, deriving a shadow rate for Sweden.

  • 3.

    Given their financing through the financial market, corporate and mortgage spreads are important indicators of financing conditions for firms, but also foreign market conditions are extremely important for Swedish banks and firms.

About the authors

Paola Di Casola

Paola Di Casola is Senior Economist at DG-International, International Policy Analysis Division of the European Central Bank (ECB). She holds a PhD in Economics from Stockholm School of Economics and has previously worked at Sveriges Riksbank. Her expertise and research interests are in monetary economics, international macroeconomics and business cycles.

Pär Stockhammar

Pär Stockhammar is Senior Economist at the Monetary Policy Department, Sveriges Riksbank. His main research interests are Econometrics and Statistics.

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