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

In the last few years, the Riksbank has conducted a monetary policy that has led to substantially lower inflation than the inflation target and unnecessarily high unemployment. The Riksbank has more recently justified this policy by maintaining that a lower policy rate would increase the household debt ratio (the ratio of debt to disposable income) and thereby any risks associated with the debt. But the Riksbank has not presented any analysis of how monetary policy and the policy rate affect household indebtedness. It has simply taken as given that a higher policy rate leads to a lower debt ratio than a lower policy rate.

But does a higher policy rate really lead to a lower debt ratio? I have examined this issue in a new paper entitled “‘Leaning against the wind’ increases (not reduces) the household debt-to-GDP ratio.” The paper shows that a higher policy rate leads to a higher debt ratio, not a lower one. This result may be surprising to some, at least at the Riksbank, which has apparently made a sign error in its assumptions. The result is actually quite easy to understand once one carefully considers how debt, GDP and inflation are affected by a higher policy rate. Continue reading →