Monetary Policy and Leading Indicators of Inflation in Sweden

This paper derives a set of leading indicators of inflation for Sweden. It also discusses developments that led to the adoption of the inflation-targeting framework and the changes in the operational procedures for conducting monetary policy that were necessitated by the shift to inflation targeting. Nonstructural vector autoregressions are used for estimating the leading indicators of inflation. The paper examines the advantages and disadvantages of deriving leading indicators of inflation from nonstructural vector autoregressions and discusses how to interpret these results for policy purposes. The main findings are: (1) narrow money is the most powerful leading indicator of inflation; (2) broad money and inflation expectations have significant predictive information on inflation; (3) the output gap, interest rates, and the credit aggregate have some predictive information on inflation, and this information is confined to a shorter time horizon than either the monetary aggregates or inflation expectations; and (4) implied forward rates have only weak predictive information on inflation.