woods, and fully floating exchange rates, would be intervention bands and controlled exchange rates between, for instance, the euro and the dollar. however, this would partly suffer from the same problems as a fully fixed regime. furthermore, we would encounter the same dilemma that characterised all semi - fixed, or fixed but adjustable exchange rate arrangements, which failed so miserably over the past ten years. the list is long, from sweden ’ s and the erm countries ’ crisis at the beginning of the 1990s, to the crises in mexico, asia, russia and brazil during the subsequent decade. all displayed some similar characteristics, which a controlled exchange rate between the dollar and euro would also be unable to escape. at some point in time, the market becomes aware that the political gains of avoiding painful real adjustments are probably less than the costs and loss of prestige associated with an exchange rate adjustment. once the market realises this, speculation follows and the costs of defending the exchange rate mount, at the same as the potential loss of prestige from adjustment diminishes. in the end, an exchange rate adjustment becomes economically unavoidable and politically acceptable regardless of whether politicians wanted it. of course, such a spiral is not possible with a single currency where adjustments must occur without devaluation and where speculation of this kind is impossible. do not these arguments lead us to conclude that china too should let its currency float? after all, china is one of the world ’ s largest economies that in spite of its increasing openness follows a course of its own. critics of the dollar peg believe that if the renminbi were allowed to float, it would appreciate, thus reducing china ’ s current account surplus and shrinking the us deficit. in the long term, i believe that it is right to allow the renminbi to float. in the short term, however, it is difficult to see this as the appropriate solution. the main reason for not floating the renminbi yet is the chinese financial system. the chinese banking system is still a long way from being adapted to market conditions, and a large proportion of its lending is still made to state - owned companies that are often unable to honour their payment obligations. if we take into account all the hidden and disclosed nonperforming loans in the banking system, these are estimated to be equal to as much as half of china ’ s gdp, and they are continuing to grow. were the currency allowed to float before addressing these problems, it is just as likely

on securities let me begin with yields on government securities, which fell. on the surface, this looks like a typical portfolio balance effect that has been highlighted in many studies, for instance vayanos and vila ( 2021 ). the idea is that the policy rate is limited by its lower bound, but that the yield curve slopes upwards so that interest rates at longer maturities can be pushed down. when the central bank buys government bonds with long maturities, investors who want debt instruments with long maturities need to seek other investments. this means that prices rise, that is, the rates fall, also on other assets with long maturities. as borrowers then gain access to cheaper financing, monetary policy has become more expansionary. but for several reasons, this was not really how it worked in sweden. certainly, rates on government securities appear to have fallen. this is supported by event studies which investigate how market rates are affected by new information on asset purchases. 5 erikson ( 2021 ) also finds that rates on government securities fell apace with the riksbank's holdings increasing from 2015 to 2017, but he shows that the rate fell on the shortest maturities. at the end of 2017, the rate on government securities with short maturities was between 20 and 35 basis points lower than the riksbank's policy rate, depending on the measure used ( see figure 2 ). 6 event studies show that the rate on government bonds fell by 30 - 50 basis points in total as a result of the riksbank's purchases during 2015 - 2017. erikson's study indicates that the entire decline in long - term interest rates occurred as a result of the short - term interest rates on government securities being pushed down and expected to remain so. the interest rate effect appears to have arisen through a general shortage of government securities ( a negative liquidity premium, even on the very shortest maturities ) rather than the term premiums being pushed down. if our purchases entailed lower premiums on government bonds, the rate on government bonds should have fallen in relation to the expected average policy rate over the maturity of the bond. one way of examining this is to compare the rate on government bonds with expectations of the future policy rate, as in the left panel of figure 3. 7 we see a clear fall in the interest rate differential of about 20 basis points when purchases started in early 2015 and then a further fall around 5 see de rezende, kjellberg and