One possibility the Riksbank and other central banks have made use of to make their monetary policy more expansionary when the policy rate is at or close to the lower bound is to buy government bonds on the secondary market. This affects market rates and other financial prices through various channels. 15 What one normally talks about are the signalling channel – which works through the purchases signalling that monetary policy will be expansionary and the repo rate will remain at the lower bound a long time, the portfolio balance channel – which means that the purchases will have contagion effects on prices of other assets and the premium channel – that works through purchases reducing the supply of bonds, which pushes up bond prices so that interest rates fall. As this is a new monetary policy tool, it has given rise to extensive academic research that attempts to estimate its effects. The most common conclusion is that the policy has functioned more or less as expected and complemented the policy rate cuts in a useful way. 16 One problem for Sweden is that it will become more difficult to use government bond purchases as a tool in the next economic downturn as the Riksbank already owns a large share of the outstanding stock of government bonds, just over 40 per cent. These are not then available for trading on the market, which contributes to making the market less liquid and means it takes longer to make transactions.

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