Monthly Archives: February 2014

The end for the Riksbank’s leaning against the wind?

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

Have we now seen the end for the Riksbank’s leaning against the wind, after the numbers reported by Executive Board member Martin Flodén’s Ekonomistas post (English translation) and the Riksbank’s latest Monetary Policy Report? According to these numbers, the “cost,” in terms of an increase in the unemployment rate, would be at least 10 times, and even at least 50 times the “benefit,” in the form of a better outcome in a possible future crisis.  Continue reading

New publication: “Monetary Policy Trade-Offs in an Estimated Open-Economy DSGE Model” (with Malin Adolfson and Stefan Laséen, Sveriges Riksbank, and Jesper Lindé, Federal Reserve Board)

New publication: “Monetary Policy Trade-Offs in an Estimated Open-Economy DSGE Model” (with Malin Adolfson and Stefan Laséen, Sveriges Riksbank, and Jesper Lindé, Federal Reserve Board), Journal of Economic Dynamics and Control 42 (2014), 33-49. PDFAbstract .

Is the Riksbank right in that the now wealthier Swedish households would be more vulnerable?

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

From 1995 to now, Swedish households’ debt relative to their disposable income has almost doubled, from about 90 percent of disposable income to about 170 percent. The Riksbank maintains that the higher debt relative to income has made the households more vulnerable. “[A]s household indebtedness is now very high the households are more vulnerable” is a typical statement. But during the same period, the households’ assets and net worth has approximately doubled relative to disposable income, and is now about 580 and 410 percent, respectively, of disposable income. Households have thus become twice as wealthy relative to disposable income. Have the Swedish households, with now twice as much wealth relative to income, really become more vulnerable, as the Riksbank seems to imply?  Continue reading

The Riksbank: The effect of the policy rate on the debt ratio is neither economically nor statistically significant

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

The Riksbank tries, in a box in its latest Monetary Policy Report, to counter my research and my posts about the effect of monetary policy on household indebtedness. The Riksbank tries to show that the effect of a lower policy rate is to increase real debt and the debt ratio, not to decrease them, as I have maintained. It is of course positive that the Riksbank engages in a discussion of these matters and tries to justify its policy better. But the Riksbank’s estimated effect turns out to be very small and not economically significant. And with a considerable margin, it is not statistically significant. In addition, the econometric model used in the estimation is not correctly specified. The Riksbank’s box thus has little weight, and it provides no support for the Riksbank’s policy.  Continue reading

Is the Riksbank right about Swedish mortgages posing a threat to financial stability?

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

The Riksbank is fighting an uphill battle to ex post justify the monetary policy that, with too high a policy rate, has led to an inflation far below the target and an unemployment far above a reasonable long-run sustainable rate. It is not going very well. The Riksbank has, for instance, stated that (1) households’ expectations about future mortgage rates are too low. It has also stated that (2) higher debt has led to a larger fall in consumption and rise in unemployment, in the countries that were hit by a fall in housing prices during the recent crisis. But it is difficult to find any foundation for these two statements, which can be seen in this and this post. Furthermore, even if the statements were true, it does not follow that tighter monetary policy is the best response or that it would even improve the situation. For instance, a lower inflation than expected has led till a higher debt burden (not lower). The Riksbank has also stated that (3) a fall in housing prices might make banks’ financing of the mortgages more difficult and this way threaten financial stability. Is there any foundation for this third statement?  Continue reading

Unemployment and monetary policy – update for the year 2013

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

How much higher is the unemployment rate because of the Riksbank’s monetary policy the last few years? This is a controversial question that the Riksbank prefers to avoid. Previously I haved reported a calculation of how much higher the unemployment rate has become up to the beginning of 2013, compared with if the policy rate had been kept unchanged at 0.25 percent since June/July 2010. My calculation has been criticized with obscure arguments in a speech by Per Jansson (for instance, that a low policy rate would not have been “realistc”). I have responded to Jansson’s criticism in a previous post. Now I have updated the calculation to include the whole year of 2013. The annual average during 2013 of the unemployment rate has as far as can be judged become about 1.2 percentage points higher, corresponding to 60 000 more unemployed, compared with what it would have been with an unchanged policy rate of 0.25 percent since the summer of 2010. With such a low policy rate, the inflation rate would have been higher and very close to the inflation target, and, as far as can be judged, the household debt-to-income ratio would have been a few percentage points lower, not higher.  Continue reading

How is the Riksbank handling the facts?

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

The Riksbank maintains that household debt in Sweden is associated with risks and that this justifies a tight monetary policy resulting in low inflation and high unemployment. A representative statement about why household debt implies risks is given in a recent speech by the Executive Board member Kerstin af Jochnick (page 2):

We saw in the most recent financial crisis that high indebtedness in the household sector can create problems, with some countries suffering a severe fall in house prices. When the value of houses declines, households begin to save more. When savings increase, consumption decreases and thus demand in the economy falls. Ultimately, this can lead to lower production and higher unemployment. We do not want to see this kind of development in Sweden.

But is it really true that higher debt led to a larger fall in consumption and a larger rise in unemployment in the countries where housing prices fell during the financial crisis? Does this agree with the facts?  Continue reading