Sveriges Riksbank Research Articles

Real-Time Forecasting For Monetary Policy Analysis: The Case of Sveriges Riksbank

We evaluate forecasts made in real time to support monetary policy decisions at Sveriges Riksbank (the central bank of Sweden) from 2007 to 2013. We compare forecasts made with a DSGE model and a BVAR model with judgemental forecasts published by the Riksbank, and we evaluate the usefulness of conditioning information for the model-based forecasts. We also study the perceived usefulness of model forecasts for central bank policymakers when producing the judgemental forecasts.

Contribution to contract theory

Oliver Hart and Bengt Holmstrom share the Nobel Prize in Economic Sciences for 2016, awarded to them by Sveriges Riksbank. They have been rewarded for their work in enhancing the design of contracts, i.e. arrangements connecting employers with employees or companies with clients, in other words, for their contribution to contract theory in the 1970s and 1980s. Their analysis of optimal contractual arrangements lays an intellectual foundation for designing policies and institutions in many areas, from bankruptcy legislation to political constitutions. Hart is an expert in contract theory, theory of the firm, corporate finance, and law and economics. His contribution to contract theory is exquisite when it comes to designing contracts which cover eventualities that cannot be precisely specified in advance.

Inflation Forecasts Versus Shaping Inflation Expectations. Comparative Analysis

This article jointly analyzes inflation expectations of consumers and inflation forecasts. Its starting point is the predominant role of expectations in monetary policy. This is crucial market information in the decision-making process of the central bankers as it may show the actual future inflation. On the other hand, the central bank wants to influence expectations in order to facilitate achieving the main goals of monetary policy. Inflation forecasting is a tool for shaping public expectations. In the research, covering four central banks (the National Bank of Hungary, National Bank of Poland, the Czech National Bank, Sveriges Riksbank), the author analyzes the interdependencies of inflation forecasts and inflation expectations of consumers. Data on expectations are derived from the surveys and quantified. Then non-parametric measures of association are calculated. The results confirm the hypothesis on the existence of such relationships. The strength of this interdependence varies among countries, from weak to strong. The study opens the field for further discussions on strengthening this relationship.

Tirole's Industrial Regulation and Organization Legacy in Economics

AbstractJean Tirole was awarded the 2014 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for his analysis of market power and regulation. This paper provides an overview of some of that work, and of his related contributions to game theory.

Econometrics as a Pluralistic Scientific Tool for Economic Planning: On Lawrence R. Klein's Econometrics

Lawrence R. Klein (1920-2013) played a major role in the construction and in the further dissemination of econometrics from the 1940s. Considered as one of the main developers and practitioners of macroeconometrics, Klein's influence is reflected in his application of econometric modelling to the analysis of economic fluctuations and economic policies for which he was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 1980. The purpose of this paper is to give an account of Klein's image of econometrics focusing on his early period as an econometrician (1944-1950), and more specifically on his period as a Cowlesman (1944-1947). Independently of how short this period might appear, it contains a set of fundamental publications and events, which were decisive for Klein's conception of econometrics, and which formed Klein's unique way of doing econometrics. At least four features are worth mentioning, which characterise this uniqueness. First, Klein was the only Cowlesman who carried on the macroeconometric programme beyond the 1940s, even if the Cowles had already abandoned it. Second, his pluralistic approach in terms of economic theory allowed him not only to use the Walrasian framework appraised by the Cowles Commission and especially by T.C. Koopmans, but also the Marxian and Keynesian frameworks, enriching the process of model specification and motivating economists of different stripes to make use of the nascent econometrics. Third, Klein differentiated himself from the rigid methodology praised at Cowles; while the latter promoted the use of highly sophisticated methods of estimation, Klein was convinced that institutional reality and economic intuition would contribute more to econometrics than the sophistication of these statistical techniques. Last but not least, Klein never gave up what he thought was the political objective of econometrics: economic planning and social reform.

Is there a scientific responsibility of the leading world economists for ignoring the causes, scale and depth of the global economic crisis started in 2008?

One of the main functions of a creative and responsible scientific work is a critical analysis of the reality and processes in the field which that particular science studies. In order to come to new and better, socially and scientifically worthier solutions, a science must deal, in a critical and studious way, with the reality it faces. For exceptional scientists and researchers in the field of economy, the Nobel Prize in Economic Sciences has been installed, since 1969, as the greatest acknowledgment. Based on a grand jury nomination, this award is granted, once a year, by the Swedish Academy of Sciences, and financed by the Central Bank of Sweden (Sveriges Riksbank). Since its' foundation, the Nobel Prize in Economic Sciences has been granted to 75 laureates, among whom 53 came from the USA, and 26 from the University of Chicago. If the scientific responsibility of economists is to analyze the local and global economic reality in a critical way, to warn about the mistakes politicians make, and anticipate the consequences of these wrong economic policies, how is it possible that American economists and Nobel laureates most of all, haven't warned about the disastrous effects of the American financial politic and the upcoming financial crisis that spilled out on the entire world and caused the global economic recession? The author's main hypothesis is: Despite the a priori rule of the democratic capitalism about the necessary separation of the economy from the politic, the economic liberalism and the neoliberalism, so much praised and expanded by the globalization process, is in fact a form of implementation of the American New World Order geopolitical concept, that has been launched in 1991 by Georges Bush Senior and inspired by the great theorist and expert in matters of foreign politics: Zbigniew Brzezinski. Based on this analysis, one could conclude that in every scientific field, especially in social sciences and economy, it is necessary and crucial for the researchers and leading minds, to keep the mandatory critical distance towards the current social, political and economical developments, as well on the local as on the global level, in order to act as a much needed corrective instance of the ongoing processes. This is the only way science can be the anticipator of the future processes, the critic of current developments and the required corrective instance of the economic policy of any national administration. Otherwise, the science and scientific responsibility is degraded to being only an affirmation and a marketing promotion of the ruling centers of power, political parties or eminent rulers.

The theory of stable allocations and the practice of market design. The Nobel Prize in Economics 2012 for Alvin E. Roth and Lloyd S. Shapley

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2012 was awarded jointly to Alvin E. Roth and Lloyd S. Shapley for their contributions to the theory of stable allocations and the practice of market design. The theory of stable allocations consists of a family of models that study assignment problems in which two disjoint sets of agents (or a set of agents and a set of objects) have to be matched. For example, men to women, workers to firms, students to schools, or patients to live donor kidneys. A matching is stable if no subset of agents can improved upon their proposed matches by rematching only among themselves. Stability is an essential property if matching is voluntary. The practice of market design consists of applying those two-sided matching models to specific assignment problems with the aim of proposing improvements on how they are solved. This paper presents a brief description of the academic career of the laureates and describes their contributions by presenting the most basic two-sided matching model and some of its market design applications, including the organization of a centralized system to propose kidney transplantations to use kidneys of live donors that are incompatible with their respective patients, the yearly assignment of North-American medical students to hospital internship programs, and children to schools in cities such as Boston and New York.

Does the Clarity of Inflation Reports Affect Volatility in Financial Markets?

We study whether clarity of central bank inflation reports affects return volatility in financial markets. We measure clarity of reports by the Czech National Bank, the European Central Bank, the Bank of England, and Sveriges Riksbank using the Flesch-Kincaid grade level, a standard readability measure. We find some evidence, mainly for the euro area, of a negative relationship between clarity and market volatility prior to and during the early stage of the global financial crisis. As the crisis unfolded, there is no longer robust evidence of a negative connection. We conclude that reducing noise using clear reports is possible but not without challenges, especially in times of crisis.

Does the Clarity of Inflation Reports Affect Volatility in Financial Markets?

We study whether clarity of central bank inflation reports affects return volatility in financial markets. We measure clarity of reports by the Czech National Bank, the European Central Bank, the Bank of England, and Sveriges Riksbank using the Flesch-Kincaid grade level, a standard readability measure. We find some evidence, mainly for the euro area, of a negative relationship between clarity and market volatility prior to and during the early stage of the global financial crisis. As the crisis unfolded, there is no longer robust evidence of a negative connection. We conclude that reducing noise using clear reports is possible but not without challenges, especially in times of crisis.

Does the Clarity of Inflation Reports Affect Volatility in Financial Markets?

We study whether clarity of central bank inflation reports affects return volatility in financial markets. We measure clarity of reports by the Czech National Bank, the European Central Bank, the Bank of England, and Sveriges Riksbank using the Flesch-Kincaid grade level, a standard readability measure. We find some evidence, mainly for the euro area, of a negative relationship between clarity and market volatility prior to and during the early stage of the global financial crisis. As the crisis unfolded, there is no longer robust evidence of a negative connection. We conclude that reducing noise using clear reports is possible but not without challenges, especially in times of crisis.

PDB40: The Protein Data Bank celebrates its 40th birthday

PDB40: The Protein Data Bank celebrates its 40th birthday

Thinking, Fast and Slow by Daniel Kahneman

Thinking, Fast and Slow, by Daniel Kahneman, 2011, New York: Farrar, Straus and Giroux, 499 pp. ISBN: 978-0-37427-563-1.Cognitive psychologist and Nobel Laureate Daniel Kahneman will be familiar to most Journal of Risk and Insurance (JRI) readers because of his work with mathematical and cognitive psychologist Amos Tversky regarding decision making when risk is involved. of their more frequently cited articles on this subject, Judgment Under Uncertainty: and Biases, originally published in Science, Vol. 185, in 1974, and Choices, Values and Frames, originally published in American Psychologist, Vol. 34, in 1984, were cited by the Nobel Committee when awarding Kahneman the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, more familiarly known as the Nobel Prize in Economics, in 2002.1WhUe Kahneman devotes some time discussing this work in his introduction, it is not the primary focus of this book. In Thinking, Fast and Slow, Kahneman uses his considerable wealth of knowledge of behavioral economics, statistics, and the psychology of judgment and decision making to discuss what recent research tells us about why people make bad choices, including some involving risk.Thinking fast occurs when persons rely on what psychologists refer to as 1, a kind of thinking that occurs automatically and very quickly, includes the automatic development of memories, and is associated more with impressions and feelings. Thinking slow happens when persons rely on 2, a more effortful way of thinking that requires concentration and helps more effectively manage complex problem solving, for example. Loss aversion is a system 1 characteristic traceable to the amygdala, the brain's threat detection center. As we all understand, for most persons, losses hurt more than gains of identical amount help. Calculating an expected return on an investment portfolio or a fair risk premium also requires system 2 resources.Not surprisingly, Kahneman traces most errors of judgment and decision making back to an overreliance on system 1 thinking. Because the system 1 /system 2 framework seems so essential in understanding the rest of the book, the writer devotes the first nine chapters to it; these chapters collectively constitute Part I, Two Systems.Nearly all of the research cited in this section comes from publications in neuroscience, psychology, and science journals and concerns mainly how the brain functions. The author explains the research using a conversational and largely nontechnical tone so that a reader with only a modest understanding of psychology can understand these chapters.In Heuristics and Biases, Part II, Kahneman addresses judgment heuristics, or simple, efficient rules that can help explain how judgments get made. He also considers cognitive biases, or in general terms, thought patterns that contribute to irrational decisions. He talks about how these rules and biases apply to statistics, a subject that most would agree requires complex thinking. The statistical issues he addresses are lower level concerns, ranging in simplicity from selecting the right sample size to establishing accurate probability estimates to regression to the mean. All of these topics should be easily accessible to most if not all JRI readers.Part II contains a host of interesting insights, including the fact that most trained researchers ignore sample size requirements when conducting studies, typically relying on samples that are simply too small to generate valid inferences. One of the most fascinating chapters, Chapter 16, Causes Trump Statistics, includes evidence that people will ignore scientifically valid statistics in favor of compelling stories that touch their emotions. In practice, this means that using one or two representative cases in, say, explaining why all homeowners in a flood-prone area should be required to purchase homeowners insurance will be far more effective in persuading most consumers and politicians than a statistics-heavy presentation documenting total losses, for example. …

CISS — A Portfolio-Theoretic Framework for the Construction of Composite Financial Stress Indices

This paper introduces a novel indicator of current stress in the …nancial system as a whole named Composite Indicator of Systemic Stress (CISS). Its speci…c statistical design is shaped in accordance with standard de…nitions of systemic risk. The main innovative feature of the CISS is the application of portfolio theory to the aggregation of individual stress indicators into the composite index. Along the lines of how portfolio risk is computed from the risks of individual assets, we propose to compute the level of stress in the system as a whole by aggregating …ve market-speci…c subindices of stress - comprising a total of 15 individual stress indicators - on the basis of a time-varying measure of the cross-correlations � We thank Philipp Hartmann for inspiring and supporting this project throughout all stages. Philipp also invented the indicator’s name and its abbreviation CISS (pronounced like “kiss”). We thank Tommy Kostka for outstanding research assistance and for several good ideas which helped improving the CISS. Very helpful comments from Geert Bekaert, Hans Degreyse, Wolfgang Lemke, Simone Manganelli, Seth Pruitt and an anonymous referee are gratefully acknowledged. We …nally thank seminar participants at the Euro Area Business Cycle Network conference “Econometric Modelling of Macro-Financial Linkages”in Florence, the 5th CSDA International Conference on Computational and Financial Econometrics in London, the Board of Governors of the Federal Reserve System, the Sveriges Riksbank, the AEA 2013 Annual Meeting in San Diego and the joint Federal Reserve Bank of Cleveland and O¢ ce of Financial Research conference “Financial Stability Analysis: Using the Tools, Finding the Data”for fruitful discussions and comments. However, the views expressed in this paper are those of the authors and do not necessarily re‡ect those of the European Central Bank, the Eurosystem or the Magyar Nemzeti Bank.

Spreading the Word: Transaction Cost Economics in the Conversation of Economics

Introduction IN THE LAST DECADES, fields of business and economics related disciplines have grown and created colossal amount of texts. Still, there is only so much time for one to read and consider what to absorb into one's intellectual portfolio. Klamer and van Dalen (2002: 290) have noted that the sheer abundance of texts to be read will render chance of being noticed at all minimal. That has not been case of transaction cost economics (TCE). TCE has become key topic in business studies and economics, much as result of Oliver Williamson's crusade. Williamson has become one of most cited scholars in social sciences (see Pessali 2006) and has been awarded Sveriges Riksbank Prize in Economic Sciences--the Nobel Prize in Economics--in 2009. This is evidence that his arguments have been widely heard. As our daily practices show, an essential part of academic life revolves around exchanging arguments, be it in oral or written form. It is through these exchanges that we learn, review ideas, build and test hypotheses, develop new theses, and so on. Many scholars have suggested that this process can be studied as conversation (Klamer 1984; McCloskey 1985; Nelson, Megill, and McCloskey 1987; Samuels 1990). To take part in conversation of business studies and economics, for instance, authors need to show what brings them close to and what separates them from certain established views. This is particularly relevant for authors claiming to swerve from dominant tradition (Klamer 2007), and even more to those striving to reach out to different discourse communities both inside and outside discipline (Goldschmidt and Szmrecsanyi 2007). On this regard, in his pioneering book Markets and Hierarchies (1975, hereafter MH), Williamson claimed to offer a distinctive worldview (1975: xii). To recognize what is distinctive, we usually draw on comparison with what is familiar. Indeed, Williamson has made many references to different groups of scholars associated with different worldviews in order to advance his ideas. As Deirdre McCloskey (1999) suggests, being attentive to one's implied readers is paramount to being read. Flipping through text, readers with different worldviews look for shared ideas, notions, premises, arguments, objects, references, models, and techniques. In their turn, authors are usually aware that presenting certain ideas or premises will bring their approach closer to this group of thinkers or away from that other group. In MH (p. 1), Williamson claims that his views belong to new institutional economics. How he relates to other established worldviews is thus no ordinary matter. The claims made about what is new, different, or complementary in relation to particular groups of scholars are bound to affect conversational feedback from his intended audiences and are relevant rhetorical ingredient in unfolding of his project. (1) Such conversational markers are our object of study here. We explore appeals made in Williamson's texts to different groups of scholars with bearing on subject of economic organization--a subject that involves business studies, economics, law, and sociology (to quote only few) to which Williamson has repeatedly claimed to relate. We then discuss rhetorical possibilities of his discourse towards those audiences. According to Williamson, quintessence of his intellectual efforts can be found in his trilogy: MH (1975), The Economic Institutions of Capitalism (1985; hereafter EIC), and The Mechanisms of Governance (1996; hereafter MG) (see MG: 18). His trilogy on TCE will be thus our main, though not exclusive, source for analysis. In what follows, one section will be dedicated to each one of books, trying to follow conversations in chronological order. Markets and Hierarchies: In Beginning There Were Many Invitations Williamson (1995: 118) separates his work into three periods: before 1970, during which time I was working mainly within an orthodox setup; decade of 1970s, which was transition interval, and after 1980, by which time my shift into transaction cost economics was complete. …

How Informative are Central Bank Assessments of Macroeconomic Risks?

Surveying the forecasting practice of several central banks, we find that all these banks issue statements about risks to their macroeconomic forecasts. Often the balance of these risks is assessed as well. Upward [downward] risks to the forecast commonly imply that the outturn is expected to lie above [below] the central forecast. Investigating the inflation risk forecasts of the Bank of England and the Sveriges Riksbank, however, we do not find conclusive evidence for informativeness, that is, for a systematic connection between risk assessments and forecast errors. Thus, it seems questionable whether macroeconomic risk forecasts are meaningful.

Three Laureates Explained Why Unemployment Is Inevitable

Peter Diamond, Dale Mortensen, and Christopher Pissarides won this year's Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for laying out the theory that explains why full employment is impossible.

Epilogue: Popperian Perspectives on Transaction Cost Economics and Future Directions of Empirical Research

The 2009 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel Prize to Oliver Williamson was not a surprise to scholars in business research. Transaction cost economics (TCE) has been among the most important streams of empirical investigation in business research during the last four decades. TCE has formed, developed and changed business research across disciplines during this era. Williamson, (1999:1092) himself noted that “ I have no hesitation, however, in declaring that transaction cost economics is an empirical success story.” The Nobel Prize is a milestone event in business research, and the use of the criterion of falsification in this essay provides a compass to navigate future efforts. We present potential avenues of TCE research based on a Popperian lens focused on research discussed throughout this milestone issue of the Journal of Retailing.

Professor Sir Clive W.J. Granger and Cointegration

In the introduction to Chris Sims (1977), my comments on Clive Granger’s paper with Paul Newbold (Granger and Newbold, 1977b) are described as ‘acerbic’, hardly an auspicious start to a long friendship. At issue during that 1975 conference was a disagreement over what later came to be called cointegration: its existence seemed all too obvious to me–and many others at the London School of Economics–but was essentially denied by Clive. Consequently, I missed the key point that Clive later developed into one of the foundations for modeling non-stationary time series, namely a dynamic system with a reducedrank feedback matrix must generate integrated data, the insight for which he was awarded The Sveriges Riksbank Prize in Economic Science in Memory of Alfred Nobel in October 2003 (see Hendry, 2004). His research opened a door to powerful new ideas and methods: there are more than 11000 citations to his joint paper on cointegration with Rob Engle (Engle and Granger, 1987), who shared the 2003 Prize for his invention of the autoregressive conditional heteroskedasticity (ARCH) model. First I digress to discuss why Clive discovered what he denied, when LSE missed.

In memory of Clive Granger: an advisory board member of the journal

In memory of Clive Granger: an advisory board member of the journal

Theorist Revolutionized Study of What Gets Made Where

NOBEL PRIZE IN ECONOMICSPaul Krugman, an economist at Princeton University, has won this year's Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for his analyses of international trade and economic geography.