Abstract
As the world grapples with rising prices, central banks are taking action. In less than two years, the US Federal Reserve, steering the world's largest economy, has hiked its interest rate by 500 basis points. This rapid shift is not just a headline for Wall Street; it has implications for economies worldwide, including ours here in Sweden. In this staff memo, we analyse how changes in US monetary policy impact Sweden’s economy. Additionally, we assess the broader influence of global economic dynamics on the Swedish economy. For our analysis, we use the Global Vector Error Correction (GVEC) model – a standard and common tool that we have specifically tailored to the Swedish economy. Our findings suggest that even a small increase in US interest rates can significantly slow down Sweden’s economy. This is not just because of the direct effects of the US rate change on Sweden. Rather, such a shift in US policy sets off a chain reaction in the global economy, affecting many countries and markets, including those with which Sweden has close ties. This ripple effect can significantly reduce Sweden’s economic growth, even when the direct effects from the US are relatively small. In a broader context, our research reveals that almost 73% of fluctuations in the Swedish economy can be traced back to international factors. Among these, the US, the Euro area, the UK, China and Norway emerge as dominant contributors. This finding highlights the importance of global economic dynamics in shaping Sweden's economy.