Explain and summarise two fiscal and two monetary policies that Sweden has implemented in order to counter the negative macroeconomic impact of the pandemic. Choose one of such policies and use the Neoclassical Model of Income Determination to graphically explain the impact of the policy on the macro-economy. Make sure to carefully explain the impact of the policy on the macroeconomic aggregates.

Information:

Fiscal:

Based on the authorities' estimates, the announced and implemented fiscal measures for 2020 including capital injections, liquidity support and guarantees amount to SEK 803 billion (16.0 percent of 2019 GDP, respectively) depending on uptake (the debt and deficit impact may deviate from these amounts). Measures include (i) additional expenditures on wage subsidies for short-term leave, increase in transfers to relevant agencies to deal with the coronavirus outbreak and its repercussions, temporary payment of sick leave (also for sole traders), loans to SMEs, more funding to the media, cultural and sports sectors and for education and training, temporary rent subsidies to vulnerable sectors, temporarily more generous unemployment benefits, expanded active labor market policies, expansion of education, initiatives for green jobs and summer jobs for young people, temporary reduction of employers' social security contributions, increased testing for COVID-19, additional general grants to municipalities and regions, temporary grants to businesses based on their loss of turnover to cover their fixed costs, more funding to train health workers, supplementary housing allowances to families with children, infrastructure investment, extra support to regional public transport, measures to prevent COVID-19 fraud, aid to regional airports, capital injections to SAS and state-owned enterprises (airport operator Swedavia and education and matching firm Lernia), increases in appropriations to public aviation and maritime agencies, and temporary compensation for people belonging to a risk group (SEK 257 billion); (ii) deferral of a maximum of three month worth of payments of companies' social contributions, VAT and payroll taxes for a period of up to 12 months (SEK 27 billion if uptake similar to GFC, and SEK 315 billion if fully used by all firms), deferral of annual VAT for 2019 (SEK 7 billion) and deferral of SME taxes (SEK 13 billion); and (iii) credit guarantees for Swedish airlines, expansion of the Export Credit Agency's credit guarantee framework and the Export Credit Corporation, state credit guarantees for loans to companies (extended until December 31, 2020), guarantees to the EU for loans to member states, SURE, and to the European Investment Bank for a guarantee fund to support companies (in total SEK 250 billion). To support the international response, Sweden will contribute SEK 40 million to the WHO's Contingency Fund for Emergencies. In September, authorities approved additional support to municipalities to cover COVID-19-related costs (SEK 5.5. billion in 2020) and to sole traders (SEK 3.5 billion in 2020 and SEK 1.5 billion in 2021).

For 2021 and 2022, the Government proposed extensive fiscal stimulus measures and reforms worth SEK 105 billion and SEK 85 billion (2.1 and 1.7 percent of 2019 GDP, respectively).

On November 9, the Government proposed the extension of short-term lay-offs by seven months (until June 30, 2021), reorientation support and turnover-based support to sole traders by three months (until October 2020), and tax deferrals by one year (until March 2022).

On December 10, the Government proposed to extend the state credit guarantee program for loans to companies until June 30, 2021.

On December 22, the turnover-based support to sole traders was extended until February 2021 (later further prolonged until April 2021). On February 24, the government announced that extended turnover-based support will also be available to sole traders and trading partnerships who have received unemployment benefits and have taken parental or sick leave during the reference period with an announced extension on March 25 to cover May and June 2021.

On April 15, the government presented the 2021 Spring Fiscal Policy Billwhich includes further measures to limit the spread of the virus (i.e. more vaccine purchases and coverage of health care costs) and alleviate the consequences of the pandemic for the economy and also to work Sweden out of the crisis. For example, the authorities proposed extending crisis support for culture (see announcement on May 19) and sports (see announcement on May 19) and introducing an event guarantee. On May 19, the government proposed extending the turnover-based support for sole traders and trading partnerships in which at least one partner is a natural person to cover July, August and September 2021.

Monetary:

Key monetary measures include: (i) reduction of the lending rate for overnight loans by 55 basis points to 0.2 percent and subsequently to 0.1 percent(while leaving the repo rate unchanged at 0 percent); (ii) lending of up to SEK 500 billion to companies via banks (Funding for lending); (iii) introduction of a new lending facility whereby monetary policy counterparties can borrow unlimited amounts (given adequate collateral) with a maturity of 3 and 6 months at an interest rate corresponding to the Riksbank's repo rate; (iv) increase of purchases of securities of up to SEK 700billion this year and next (where securities may include government and municipal bonds, covered bonds and securities issued by non-financial corporations); (v) the establishment of a swap facility of USD 60 billion between the Riksbank and the US Federal Reserve (mutual currency arrangement); (vi) the possibility for banks to borrow in US dollars against collateral of up to USD 60 billion (extended until September 30, 2021); (vii) easing rules for the use of covered bonds as collateral; and (viii) temporarily recognizing that all credit institutions under the supervision of the Swedish FSA can apply to become temporary monetary policy counterparties, and given that they are accepted as a temporary monetary policy counterparty, enabling them to access the new Funding for lending facility.