Free Essay: Unconventional Monetary Policy and Stock Market Prices

The Relevance of The Topic/Problem

The global economic environment has experienced uncertainties and dynamics, which make it challenging to maintain lending and relationships between stakeholders using traditional approaches. The 2008/2009 global financial crisis stretched the capacity of central banks to stimulate economic activity. Currently, the global pandemic that is COVID-19 also places central banks in a tight spot as the uniqueness of its attendant effects falls outside the scope of existing remedial strategies. Therefore, the subject of unconventional monetary policy and stock market prices in small open economies is relevant both for the present situation and situations. Quantitative easing as an economic approach has been applied for years in different countries and attracted research. However, its application in small open economies, as the study indeed notes, has not been studied exhaustively.

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Questions

MacDonald and Popiel (2017) observed that small open economies respond strongly to foreign stocks, and so there must be proper control for global variables. What are some of the international variables controlled in the case of the Swedish quantitative easing research?

MacDonald and Popiel (2017) also intimated that future studies need to quantify the cost and benefits of spillovers from monetary policy normalization or reversal. Still, they noted that these did not have symmetric impacts on small open economies. Are these observations consistent with the case of the Swedish open economy's adoption of quantitative easing?

Under limitations, the study notes that there exists a time lag between when quantitative easing is announced and when the purchase of securities of the Riksbank occur and that this makes it challenging to capture the immediate effects of quantitative easing. However, one of the potential problems attached to quantitative easing is the possibility of inequitable distribution in the sense that it is majorly felt by high-income earners. Is this challenge not detectable and preventable in the short term?

The study acknowledges that the variables captured do not encompass all the factors that influence the price level of the OMXS30. The researchers maintain a macroeconomic approach to the formation of stock prices without consideration of the individual performance of the 30 companies that make up the OMXS30. With this generalization, what makes the study unique to the Swedish quantitative easing situation? Isn't the sample small enough to examine the specifics associated with the companies?

In her attempt to determine what should be considered medium-term when considering monetary policy, Schnabel (2020) opined that factors like nature, size, and persistence of economic stock determine how long the medium-term is. She also hypothesized that unconventional policy instruments have been ineffective. Could these assertions apply to the current study's conclusion that it is too early to evaluate the long-term impact of QE on the Swedish economy despite the existence of these tools since 2015?

The purpose of the current study is "to explore the gap left by previous research regarding the relationship between the value of a central bank's assets and the returns of a relatively small stock market in a small open economy." Does the study meet its objective if the researchers note in the limitations that it "does not account for changes in the composition of the Riksbank's balance sheet, which occurred under the period of investigation?

According to Kabaca (2016), quantitative easing in small open economies is much less effective on long-term yields, which informs the high substitutability between foreign and domestic assets. Are these assertions applicable to the conclusions made on the Swedish case in the current study?

Further, Kabaca (2016) noted that foreign investor access to the domestic debt market is vital when determining the impact of quantitative easing policy and that ignoring the role of foreign investors would make the policy look more favorable. Based on this advice, what is the extent of foreign investor access to the Swedish debt market during the period of quantitative easing?

The Riksbank decided on quantitative easing in 2015 when the global financial crisis peaked in 2008/9 (Beck et al., 2019). What does this say about small open economies? In the event of a need for unconventional approaches to resuscitate the economy post-COVID-19, would small open economies be as slow to react?

Since the study relies on most generalizations, isn't the alternative hypothesis valid from the findings? Should the researcher's limitation in examining the specifics of the OMXS30 be the basis for the conclusion that no long-term relationship between the value of Riskbank's assets and the OMXS30 price level?

Conclusion

The current study is apt in its analysis of the role of quantitative easing, and the scope of previous studies. However, it exhibits multiple points from which its exhaustiveness in the evaluation of the hypothesis can be considered. The questions offer perspectives from which the depth of the study can be evaluated.

References

Ásgeirsdóttir, K. (2020). Quantitative Easing -Economic & Financial Effects of an Unconventional Monetary Policy. Student theses.cbs.dk. Retrieved 22 May 2020, from https://studenttheses.cbs.dk/bitstream/handle/10417/4884/katla_asgeirsdottir.pdf?sequence=1.

Beck, R., Duca, I., & Stracca, L. (2019). Medium-term treatment and side effects of quantitative easing: international evidence. Retrieved from https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2229~00d920df20.en.pdf

Benford, J., Berry, S., Nikolov, K., Young, C., & Robson, M. (2009). Quantitative easing. Bank of England. Quarterly Bulletin, 49(2), 90.

Kabaca, S. (2016). Quantitative easing in a small open economy: An international portfolio balancing approach (No. 2016-55). Bank of Canada Staff Working Paper. https://www.bankofcanada.ca/wp-content/uploads/2016/12/swp2016-55.pdf

MacDonald, M., & Popiel, M. K. (2017). Unconventional monetary policy in a small open economy. International Monetary Fund. Retrieved from https://www.econstor.eu/bitstream/10419/149093/1/867677864.pdf

Michaelis, H., & Watzka, S. (2017). Are there differences in the effectiveness of quantitative easing at the zero-lower-bound in Japan over time? Journal of International Money and Finance, 70, 204-233. https://www.econstor.eu/bitstream/10419/102121/1/cesifo_wp4901.pdf

Moessner, R., De Haan, J., & Jansen, D. J. (2016). Effectiveness of monetary policy in Sweden. Contemporary Economic Policy, 34(4), 698-709. doi:10.1111/coep.12160

Schnabel, I. (2020). How long is the medium term? Monetary policy in a low inflation environment. European Central Bank. Retrieved 22 May 2020, from https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp200227_2~301776ff2a.en.html.

Soumaoro, S., & Sandgren, P. (2018). ECB and Riksbank quantitative easing effect on the Swedish economy. http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=8949772&fileOId=8949784

Svensson, L. E. (2012). Practical monetary policy: Examples from Sweden and the United States (No. w17823). National Bureau of Economic Research. https://www.nber.org/papers/w17823.pdf