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Trend Movements in the Swedish Krona Exchange Rate against the Euro – An Explanatory Framework

Author

Listed:
  • Ronald Albers
  • Staffan Lindén

Abstract

The paper proposes an explanatory framework to account for long-term movements in the nominal rate of the Swedish krona against the euro. A model with few variables (short-term interest rate differentials, broad money and a measure of market volatility) tracks trend developments quite well. Our approach is anchored in purchasing power parity theory and empirics. The results show that interest rate differentials affect the exchange rate immediately, while broad money works more slowly as its effects take time to spread, but has a larger impact. The VIX, a measure of market uncertainty, captures short-term volatility and explains large swings during economic crises, consistent with the view that the Swedish krona is a risk-sensitive currency. This results in the euro-krona nominal exchange rate showing broad alignment with purchasing power parity measures over a longer period.

Suggested Citation

  • Ronald Albers & Staffan Lindén, 2026. "Trend Movements in the Swedish Krona Exchange Rate against the Euro – An Explanatory Framework," European Economy - Economic Briefs 090, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    • Handle: RePEc:euf:ecobri:090
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    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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