Determinants of Inflation - Evidence from Sweden

Sammanfattning: This thesis examines what have been the main drivers of inflation in Sweden in recent years. This is done through the New Keynesian Phillips Curve with marginal cost which serves as the theoretical background to explain inflationary behavior. An extension to the New Keynesian Phillips Curve with marginal cost is made by adding four suggested inflation drivers apparent in recent years. The contributions of each driver to inflation development are estimated using a Structural Vector Autoregression model with Bayesian methods. The result showed that inflation in 2020 was mainly driven by the output gap and labor market activity, whilst in 2021 more transitory shocks such as energy price and supply chain shocks were more prevalent. The forecast from the model indicates that energy prices and foreign monetary policy shocks will be more dominating. A shift can be seen as Sweden hit the Zero Lower Bound with monetary policy importance almost disappearing, government spending became partly deflationary and stronger influence from energy prices. Robustness tests support the results with, e.g. a more parsimonious model, albeit with more contribution from government spending. Lastly, the results support that the relationship of the New Keynesian Phillips Curve still holds to a degree, although when considering other periods, other extensions may be preferred.