New Ekonomistas post (in Swedish). This is an English translation.
The Riksbank has recently delivered an account of monetary policy in 2013 to the Riksdag for the Finance Committee’s annual assessment of the monetary policy. This account is clearly a biased account from the majority of the Riksbank’s executive board, since it hides that the Riksbank’s own calculations support the minority. Continue reading
New Ekonomistas post (in English). This is an English translation.
That low inflation and deflation increases the debt burden is well known to many. For instance, under the heading ”The spectre of eurozone deflation,” Martin Wolf recently wrote in the Financial Times: ”While falling prices would improve competitiveness, they would raise the real burden of private and public debt. This might well create another round of financial stresses.” Lower inflation than expected leads to higher real debt than anticipated and planned, and thereby increases the debt burden. In Sweden, a zero inflation rate during the last two years has led to real debt increasing in two years by SEK 40 000 for each borrowed SEK million, compared to if inflation had equaled the inflation target of 2 percent. But is this known and understood in the Riksbank? At the press conference after the publication of the Financial Stability Report on November 28, Governor Ingves was asked, if the low inflation rate made household indebtedness worse. What did he reply? Continue reading
New Ekonomistas post (in Swedish). Here is an English translation.
In an op-ed in the Swedish newspaper Dagens Nyheter on March 16, ”Felsyn att Riksbanken bara fokuserar på bostadsbubbla” (“Error in judgment that the Riksbank only focuses on a housing bubble,” in Swedish, my translation), Deputy Governors Per Jansson and Cecilia Skingsley repeat the statement that the Riksbank is not deviating from its mandate. They say this in spite of the fact that Riksbank’s “leaning against the wind” policy has led to inflation far below the target and unemployment far above a reasonable sustainable rate. They maintain that the higher policy rate, by checking increases in housing prices and household debt, would reduce the long-run risk of a future crisis and an accompanying worse macroeconomic outcome. But, strangely enough, they are quiet about the Riksbank’s own estimate that the policy rate has no long-run effect on household debt. Thereby their reasoning does not stand up to scrutiny, and the conclusion that the Riksbank is deviating from its mandate stands. Continue reading
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? Continue reading
Updated on May 3, 2015.
English translation of Ekonomistas post (in Swedish).
The Riksbank’s inflation target is 2 percent for CPI inflation. Average inflation since 1995, when the inflation target started to apply, is only 1.3 percent. Target achievement is thus bad, especially when one compares with other central banks that have had inflation target as long as the Riksbank. The Riksbank has usually defended itself by noting that target achievement is better for other measures of inflation, namely inflation measured by the price indices CPIF and previously CPIX. But a closer look shows that target achievement does not look better with CPIF and CPIX inflation. Neither does it look better with HICP inflation. Continue reading
New Ekonomistas post (in Swedish). Here is an English translation.
Lately the Riksbank has responded to some of the criticism against its policy, and the debate about monetary policy and household debt has become more lively. Don’t miss this: Continue reading
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 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
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
New post on SvD Börsforum: “Hotar bolånen den finansiella stabiliteten? (Do mortgages threaten financial stability, in Swedish)”, short version of Ekonomistas post (English translation).
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
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 “realistic”). 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
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
New Ekonomistas post (in Swedish). Here is an English translation.
The Council for Cooperation on Macroprudential Policy set up a joint analysis group in February 2013 to examine a few issues concerning household debt. (The council’s tasks have now been taken over by the newly established Financial Stability Council.)
Finansinspektionen (the Swedish Financial Supervisory Authority) published three memos of very good quality from the group in October, 2013 (unfortunately in Swedish only, although they deserve to be translated into English). They are referred to in this post (Swedish only). Now, somewhat belatedly, the Riksbank has published three more memos, of mixed quality, from the group. One of these, Memo 6 ”Risks to the macroeconomy and financial stability arising from the development in the household’s debt and housing prices,” is unfortunately somewhat biased and possibly even misleading. Continue reading
New Ekonomistas post, “What are the effects of a fall in housing prices?” (in Swedish). Here is an English translation.
One of the Riksbank’s reasons for a higher policy rate is that this would reduce the risk of a future fall in housing prices. A future fall in housing prices might lead to lower inflation and higher unemployment. But how large would the effects on inflation and unemployment be of a fall in housing prices of, for instance, 20 percent? There is a fair amount of information about this, including the Riksbank’s own reports and calculations. Most information indicates that the effects of a fall in housing prices of 20 percent would be relatively limited. They are hardly larger than the higher unemployment and lower inflation caused by the current monetary policy. Continue reading