Yearly Archives: 2013

Is it “unrealistic” to try to fulfill the inflation target?

New Ekonomistas post (in Swedish). Here is an English translation.

Previously, I have reported a so-called counterfactual analysis of the outcome for the Swedish economy from a policy rate from June/July 2010 of 0.25 percent instead of the Riksbank’s rate increases and higher policy-rate path. As far as can be judged, the outcome would have been much better. Inflation would have been much higher and very close to the target, and unemployment would have been much lower and closer to a reasonable long-run sustainable rate. In addition – perhaps somewhat surprising for some – the debt ratio would have been somewhat lower, not higher. This analysis has recently been criticized by Per Jansson, a member of the Riksbank’s Executive Board. But his criticism takes an unusual and unexpected form. Jansson does not question the actual calculation of the effects of a low policy-rate path, and he does not present any new and better analysis. Instead, according to his view, such a low policy rate was “simply not realistic.”

In my world, such a policy [with a policy rate of 0.25 percent from June/July 2010] is simply not realistic, and it is hence excluded as a meaningful comparison.

The new Board member Cecilia Skingsley has on Swedish Television expressed herself in similar terms. But Jansson and Skingsley are guilty of an error in their thinking, by mixing two very different ways of evaluating monetary policy.

One way, so-called ex post analysis, evaluates monetary policy after the outcome, that is, after the event. Such an analysis compares the actual policy and its outcome and target fulfillment with a counterfactual policy and its outcome and target fulfillment. It is such an ex post analysis that I have done.

The other way, so-called ex ante analysis, evaluates the policy, taking into consideration only the information available to the policymaker at the time of the decision. Such an analysis considers whether the Riksbank, given its information at the time of the decision, made reasonable forecasts of inflation, unemployment and other variables, and whether the Riksbank, given these forecasts, made the decision about the policy rate and policy-rate path that seemed to lead to the best target fulfillment. It seems to be such an ex ante analysis that Jansson (and Skingsley) are referring to. Mixing the two kinds of analysis leads to considerable confusion of the issue. Here I try to sort out the issue. It turns out that Jansson’s (and Skingsley’s) reasoning does not withstand scrutiny. Continue reading

Why is household debt an additional reason for fulfilling the inflation target? (Updated June 2014)

Updated June 2014, with data of May 2014.

New Ekonomistas post. Here is an English translation.

Why is household debt an additional reason for the Riksbank to fulfill the inflation target? That is, in addition to the strong reason that the inflation target of 2 percent is how the legislated price-stability objective has been made operational. Well, this is because households expect inflation approximately equal to the target. If then inflation is allowed to fall below the target, the households suffer an unexpected and unwelcome capital loss on their debt, in the form of a higher real debt, compared if inflation had equaled the target. Currently, this capital loss is considerable, for instance, SEK 50 000 for each SEK million borrowed in the fall of 2011, and SEK 90 000 for each SEK million borrowed in the spring of 2003. The capital loss leads to an unexpected and unwelcome increase in households loan-to-value ratios and a reduction of their net worth, and the households’ resilience to disturbances is reduced, compared to if inflation had been 2 percent. Continue reading

A housing-price bubble, according to Roubini and Shiller? Facts about Swedish housing prices and disposable income (updated June 2014)

Updated June 15, 2014 with the latest available data: April 2014 for housing prices and 2014Q1 for disposable income. Updated July 29, 2014, with a figure showing nominal housing prices and nominal disposable income separately.

New Ekonomistas post (in Swedish). Here is an English translation.

In a post on Project Syndicate,  Noriel Roubini warns about a Swedish housing-price bubble. He writes:

Signs that home prices are entering bubble territory in these economies include fast-rising home prices, high and rising price-to-income ratios, and high levels of mortgage debt as a share of household debt.

According to the Swedish daily Svenska Dagbladet, November 7, the Nobel laureate Robert Shiller says:

I believe people here in Sweden have an illusion that rising prices is a long-run trend, it is reminiscent of a bubble.

But what are the facts about Swedish housing prices? Are they rising fast, in real terms and in relation to disposable income? The fact is that they have fallen relative to disposable income and were in April 2014 still 7 percent lower relative to disposable income than six and a half years ago, in the fall of 2007. Continue reading

Shall monetary policy be used in an attempt to affect indebtedness (in Swedish)

Ska penningpolitiken användas för att försöka påverka skuldsättningen?” (“Shall monetary policy be used in an attempt to affect household indebtedness?”, in Swedish), my discussion at a seminar on December 5, 2013, in the Swedish Parliament,  where an excellent report by Evidens, “About household indebtedness and the housing market” (“Om hushållens skuldsättning och bostadsmarknaden,” in Swedish), was presented.

New data about Swedish household debt (in Swedish)

New Ekonomistas post: “Nya data om hushållens skulder” (“New data about Swedish household debt,” in Swedish). A comment on the recently published report of the Government Commission of Inquiry on Overindebtedness (unfortunately only available in Swedish). Using new detailed data, the Commission confirms previous results on more aggregated and partial data. The Commission concludes:

The large loans mostly belong to groups that can be expected to have better conditions for handling large loans, such as those with high incomes and high education.

The largest loans are strongly concentrated to households with the highest incomes.

Leaning Against the Leaners

Article in Central Banking 24-2 (November 2013) 27-36.

There is much debate in Sweden and further afield about the use of monetary policy – rather than macro- and micro-prudential tools – to ‘lean against the wind’ as a way of preventing dangerous bubbles building up in economies. This article looks at whether, under a mandate of flexible inflation targeting, household debt should be introduced as an additional target for monetary policy. It also reviews how to conduct policy evaluation, drawing on six years of experience gained as a policymaker at the Sveriges Riksbank.