Governor Ingves responds regarding the policy-rate effect on household debt

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

According to the Riksbank’s own estimate, the policy-rate effect on household debt is so small that one can maintain that it is neither economically nor statistically significant. What did Governor Stefan Ingves answer to a question about this at a hearing in the Riksdag’s Finance Committee? 

Here is the background: In a previous post, I (yours truly) have noted that the Riksbank’s own estimate of the policy-rate effect on the household debt ratio is neither economically nor statistically significant. Furthermore, Riksbank Deputy Governor Martin Flodén has shown in an Ekonomistas guest-post (English translation) that the debt ratio seems to have a very small effect on the increase in the unemployment rate during the recent crisis. But, according to chapter 2 of the Riksbank’s Monetary Policy Report, a higher policy rate has an economically significant cost in the form of higher unemployment. In another post, I have shown that these numbers from the Riksbank imply that the cost in the form of higher unemployment of the Riksbank’s “leaning against the wind” is at least 10 and rather at least 50 times the benefit in the form of a lower increase in unemployment in a crisis.

The Finance Committee held a public hearing on March 6 of Governor Stefan Ingves and Deputy Governor Karolina Ekholm. At the hearing, committee member Ulla Andersson brought up this issue. She recalled that many had been waiting for the above-mentioned box in the latest Monetary Policy Report with the estimate of how much monetary policy affects household debt. She noted, with reference to a figure shown by Karolina Ekholm (slide 9), that the effect of monetary policy on the debt ratio is very small. She also restated that the costs can be described as very high, whereas the effect on the debt ratio may be zero or may even increase rather decrease the debt ratio. She referred to me having said that the effect is neither economically nor statistically significant. Finally she asked what Stefan Ingves and Karolina Ekholm concluded from this and the Riksbank’s box. (Ulla Andersson’s question (in Swedish) starts at the time 1:22:30 in SVT’s web video, about 95 minutes into the Riksdag’s web video.)

Governor Ingves answered this (my transcript and English translation from the video – the response of Ingves starts at the time 1:29:00 in SVT’s web video, about 101 minutes into the Riksdag’s web video.):

Ulla Andersson asked about monetary policy and household debt. You borrow more if the interest rate is low compared to if it is high. Then it is the case that, if we are talking about very small interest-rate changes, they of course have no big effect on the debt, but they don’t have any big effect on anything else, either. Because, if you come to any other conclusion, monetary policy gets pretty strange, in the sense that monetary policy builds on demand being kept up because you borrow more. Then you simply have to live with the fact that there are limited effects in the short run. But this does not make it less urgent to handle this issue, to note the issue, and to discuss about it.

There are very many economic-policy issues that don’t lead to any big changes in the short run, because the policy measures taken are not very big. But that doesn’t mean that one should neglect the effects that are there, and then you have to work with it as well as you can. Therefore the mix of different measures matter, because if no other measures are taken anywhere, well, then you have to think about it, also from a monetary-policy and stability point of view, because we will then be left with it all, sooner or later. And then it is urgent that you think about this and who does what, and it is clear that the more anyone else does something elsewhere, the less we have to do. This is an issue that is quite important going forward.

But the whole time we are left with that, in the end, it is the inflation target what we have to steer by. This is a recurring issue and the tradeoff then is the time perspective in this. And what it means, also from the viewpoint of the inflation target, is that we some time in the future may step quite wrong.

What does Ingves really mean? And is it a satisfactory answer to committee member Ulla Andersson’s question?

Deputy Governor Ekholm answered Ulla Andersson by referring to what she had already said earlier in the hearing. She had then said (slide 8):

The effect of the repo rate on indebtedness is far too slight to affect risks linked with household indebtedness.