Monetary Policy and Investment Responses in Sweden : Evidence from Aggregate, Private and Housing Investments

Sammanfattning

This thesis examines how changes in Swedish Central Bank policy rate affect aggregate, private and housing investments in Sweden during the period 1999-2024. Economic theory predicts that lower policy rates are expected to stimulate investments due to lower cost of capital, and higher policy rates are expected to reduce the investment demand. However, the literature on this topic provides a mix of evidence regarding the strength of this expected relationship. Limited attention to Sweden has also been given to their investment behaviour during the negative policy rate period and the recent tightening period after 2022. The data used to investigate this relationship is collected from the World Bank, Statistics Sweden (SCB), International Monetary Fund (IMF) and Sveriges Riksbank. The analysis applies ordinary least squares (OLS) regressions, Dynamic distributed lag models and interaction effects models. To measure aggregate investments, gross fixed capital formation is used, while separated models are estimated for private and housing investments. To account for broader macroeconomic conditions that also might influence investments, several control variables are also included which are GDP, unemployment, inflation, lending rate, government expenditure and trade openness. The results provide mixed evidence regarding the relationship between policy rate and investments in Sweden. Aggregate investments show statistically significant responses in some model specifications and during specific monetary conditions, while private investments show statistically significant positive relationships in some models, the result is not robust across alternative model specifications. Housing investments appear to be more sensitive to monetary policy conditions which may be because the sector is more heavily dependent on external financing. Overall, the findings suggest that the relationship between policy rate and investments in Sweden is more complex than economic theory predicts. The thesis contributes to existing literature by comparing different investment categories within the same empirical framework across different monetary regimes in Sweden.