Yearly Archives: 2013

A comparison of monetary policy in Sweden with that in the Eurozone, the UK, and the US

New Ekonomistas post (in Swedish).  Here is an English translation.
Update May 2, 2015: Figures have been updated, and “December 2013” has replaced “now” and “currently” in the text and been inserted in a few places. A quote from an FT editorial May 2, 2015, has been inserted.

Is monetary policy in Sweden expansionary or contractionary? The Riksbank maintains in December 2013 that it is expansionary, since the policy rate, at 1 percent in December 2013, is historically low. But a comparison with history is hardly relevant, since we have had a global trend towards lower interest rates since the 1990s. A comparison with monetary policy in the Eurozone, the UK, and the US is more relevant.
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Zero inflation leads to higher debt, substantially higher debt

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

The most recent observation of CPI inflation from Statistics Sweden is negative, minus 0.1 percent. The inflation rate has been around zero since November 2012. This means that the CPI index, the general price level, is now at the same level as two years ago, November 2011. If the inflation rate had been 2 percent, the price level would now have been 4 percent higher than it was in November 2011.

That the inflation rate is so low has substantial consequences for household indebtedness. The real value of household debt has become 4 percent higher than if the inflation rate had been 2 percent the last two years. For every borrowed SEK million, the borrower has made a capital loss of SEK 40 000. Furthermore, with low inflation, the nominal value of housing has become lower, in contrast to the nominal debt. Therefore the loan-to-value (LTV) ratio has become higher. A new mortgage in November 2011 has now an LTV ratio that is 4 percent higher than if inflation had been 2 percent. Continue reading

Summarizing the real-economy consequences of the Riksbank’s monetary policy

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

The Riksbank has systematically neglected the inflation target by keeping inflation significantly lower than the target of 2 percent. This Ekonomistas post summarizes the real-economy consequences of this that I have covered in several previous posts. Since expectations of inflation in the short and longer run have been close to the target, average inflation has fallen significantly below expected inflation. This causes real consequences in the form of higher unemployment, an unexpected and unwelcome increase in the real value of household debt, and an unwelcome transfer of wealth from households to banks. The Riksbank thereby counteracts not only the work of the Government and the Riksdag to achieve the most important objective of economic policy, full employment, it also counteracts Finansinspektionen’s (the Swedish Financial Supervisory Authority) work to maintain financial stability and consumer protection in financial area. Continue reading

How can the Riksdag’s Finance Committee and others assess whether or not the Riksbank has fulfilled its price-stability objective?

Update April 28, 2014: Updated figure 1 available here. Average inflation since 1995 now only 1.3 percent.
English translation of Ekonomistas post (in Swedish).

How can the Riksdag’s Finance Committee and others assess whether or not the Riksbank fulfills its price-stability objective? Especially since this is made difficult since the Riksbank does not have perfect control over the inflation rate and the inflation rate cannot always be exactly on the target. But it can indeed be done, by comparing average inflation over a longer period with the inflation target, and by also comparing with target fulfilment in other countries with inflation targets to judge what is possible. Continue reading

The Riksbank increases real debt growth and deteriorates the situation for borrowers

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

As is well known, the Riksbank justifies its tight monetary policy and resulting low inflation and high unemployment with the argument that the policy is needed in order to limit household debt and reduce debt growth. But the Riksbank itself, via the inflation rate, strongly affects real debt growth. By keeping inflation below target, the Riksbank actually significantly increases real debt and real debt growth. As we all know, one can debate whether household debt is a problem in Sweden or not. However, if there is debt problem, the Riksbank is making the problem worse by undershooting the inflation target. And regardless of whether or not there is a debt problem, the Riksbank is, with it s current policy, making the situation worse for Swedish borrowers and better for Swedish banks. Continue reading

Vox column: “Leaning against the wind,” debt deflation, and the Riksbank

Leaning-against-the-wind monetary policy may lead to a Fisherian debt deflation, since it may lower prices below the anticipated level and therefore raise real debt above what was anticipated. This is what the Riksbank has done by keeping average inflation significantly below the inflation target for a long period. This has caused household real debt to be substantially higher than it would have been if inflation had been on target. Link to Vox column.

Housing prices – nominal, real, and relative to disposable income

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

There is a lot of talk about housing prices in Sweden. As Jesper Hansson has noted in an Ekonomistas post recently (the post is in Swedish), the news becomes misleading if it reports housing-price growth that neglects the seasonal pattern and seasonal adjustment. It is also common to show graphs of nominal housing prices that give a misleading impression. Graphs of real housing prices and housing prices in relation to disposable income give a more balanced impression. Continue reading

The Riksbank causes “debt deflation”

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

A dangerous thing concerning debt is what Irving Fisher (1933) called ”debt deflation.” It is usually described as deflation causing the real value of nominal debt to increase. Loan-to-value and loan-to-income ratios also increase, since the debt is fixed in nominal terms but the nominal value of assets and income fall. This may hurt the economy through bankruptcies, deleveraging, and fire sales.

But the important thing with the concept of “debt deflation” is not deflation, that is, negative deflation. The important thing is that the price level becomes lower than previously anticipated. This implies that real debt and loan-to-value and loan-to-income ratios become higher than anticipated and planned for. Everyone has probably not realized that this is something that the Riksbank has caused by neglecting the objective of price stability and conducting a monetary policy that has resulted in inflation below target. Continue reading