“Monetary Policy Strategies for the Federal Reserve,” prepared for the conference Monetary Policy Strategy, Tools, and Communication Practices—A Fed Listens Event, Federal Reserve Bank of Chicago, June 4–5, 2019. Paper. Video (my presentation starts 3 min 5 sec into the session).

Abstract

The paper finds that the general monetary policy strategy of “forecast targeting” is more suitable for fulfilling the Federal Reserve’s dual mandate of maximum employment and price stability than following a Taylor-type rule. Forecast targeting can be used for any of the more specific strategies of annual-inflation targeting, price-level targeting, temporary price-level targeting, and average-inflation targeting. The specific strategies are examined and evaluated according to how well they may fulfill the dual mandate, considering the possibilities of a binding effective lower bound for the federal funds rate and a flatter Phillips curve. Average inflation targeting is found to have some advantages over the others.

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“Amortization Requirements, Distortions, and Household Resilience:  Problems of Macroprudential Policy II,” May 2019, paper.

Abstract

Mortgage lending standards have tightened in Sweden in recent years, in particular through mandatory amortization requirements introduced by the Swedish FSA. The stated purpose is to increase the resilience of mortgagors to shocks, but it is shown that the resilience actually falls and that the tightening causes or worsens many distortions. Households without high income or wealth face higher barriers to entry into owner-occupancy. The mobility within the market for owner-occupied housing is reduced. First-time buyers without high income or wealth are excluded from the owner-occupancy market in Stockholm Municipality and many outsiders have to resort to a high-rent secondary-rental market. To prevent such exclusions, housing prices may have to fall by almost 40%. Less-than-high-income outsiders have higher housing user cost than high-income insiders. A less wealthy outsider has a higher user cost than a high-wealth insider with similar income. Mortgagors are forced to oversave and underconsume relative to their disposable income, and their consumption becomes more sensitive to income shocks. They have to save in illiquid housing equity instead of more liquid and diversified assets. They become less resilient to shocks for many years, for a very small gain in resilience later. Secondary-rental outsiders are forced to overpay, undersave, and underconsume, and their consumption becomes more sensitive to income shocks. They face less resilient to shocks, without any gain in resilience later. By design the amortization requirements make the amortization countercyclical,  which makes consumption more procyclical and sensitive to income shocks. The tightening of lending standards reduces demand for and lowers the prices of housing. This in turn reduces already too-low housing construction and worsens the structural problem of excess demand for housing. The conclusion is that this example of macroprudential policy is counterproductive and harmful to social welfare and equity.

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“Housing Prices, Household Debt, and Macroeconomic Risk: Problems of Macroprudential Policy I,” February 2019. Paper.

Abstract

This paper answers three questions about current Swedish housing prices and household debt: (1) Are housing prices too high? (2) Is household debt too high? (3) Does household debt pose an “elevated macroeconomic risk”? Finansinspektionen (the Swedish FSA) has argued that the answers to these questions are all yes  and that this has justified a substantial further tightening of already rather tight lending standards, achieved through mandatory amortization requirements and in other ways. This paper argues that the answers to the questions instead are all no, in the following sense: Regarding questions (1) and (2), there is no evidence that housing prices and household debt are higher than what is consistent with their fundamental determinants. Regarding question (3), the  “macroeconomic risk” refers to the risk of a larger fall in household consumption in a recession or crisis. There is indeed evidence from Denmark, the UK, and the US of a correlation between households’ pre-crisis indebtedness and subsequent negative consumption responses during the financial crisis 2008-2009. But there is no evidence that high household indebtedness caused a subsequent larger negative consumption response. The correlation is instead explained by an underlying common factor that caused both high pre-crisis indebtedness and a large negative consumption response during the crisis. For Denmark and the UK, the evidence is that the common factor is debt-financed household overconsumption relative to income, more precisely overconsumption financed by housing equity withdrawals. There is also evidence of debt-financed overconsumption for the US. But there is no evidence of debt-financed overconsumption of any macroeconomic significance in Sweden. Therefore, there is no evidence of Swedish household debt posing an elevated macroeconomic risk. In summary, Finansinspektionen’s tightening of lending standards lacks scientific support.

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“The Future of Monetary Policy and Macroprudential Policy,”  in ECB (2018), The Future of Central Banking, Festschrift in honour of Vitor Constancio, December 2018, European Central bank, pp. 69-123. Paper. Slides.

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