Ekonomistas guest post by Harry Flam (in Swedish). Here is an English translation.

This is a guest post by Harry Flam, professor of international economics at the Institute for International Economic Studies, Stockholm University.

The U.S. and several European countries have experienced large falls in housing prices in the wake of the financial and euro crisis. Housing market indices fell 43 percent in the U.S., nearly 50 percent in Ireland, and – so far – 30 percent in Spain. This has contributed to very negative outcomes in these countries: banks have suffered enormous credit losses and have cut down their lending, tax payers were forced to rescue many of them, households became less wealthy, and households and firms decreased demand, resulting in high unemployment.

With hindsight, it has been argued that housing prices in these countries were driven by expectations of future capital gains. Considering the fact that real housing prices in Sweden have experienced a historically large increase since the mid-1990s – prices of single-family houses have increased by about 300 percent – after having increased at the rate of the consumer price index before that, one may ask if we have a pricing bubble waiting to burst, with serious consequences for households, banks and the economy?  Continue reading →

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

Since last summer, the Riksbank has put forward a new reason for a higher repo rate (the Riksbank’s policy rate). The Riksbank suggests that households would have too low mortgage-rate expectations. But closer scrutiny shows that there is hardly any basis for the Riksbank’s suggestion. (This aside from the fact that, if households’ mortgage-rate expectations would be a problem, a higher repo rate is hardly the solution.) Continue reading →

New Ekonomistas post (in Swedish), “Problems with the housing market are no excuse for Ingves to miss the inflation target.” Here is an English translation.

In a two-page interview in the Swedish daily Dagens Nyheter on January 3 (in Swedish), the governor of the Riksbank, Stefan Ingves, is as usual worried about household indebtedness and now proposes a broad commission to reform the housing market. For the Riksbank, Stefan Ingves says, a housing market that works better would remove a problem that puts a burden on monetary policy. Then the scope would increases for more clearly focus the interest-rate decisions on achieving the inflation target “in reasonably short time,” he says. But are problems with the housing market an excuse for missing the inflation target?
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New Ekonomistas post (in Swedish). Here is an English translation.

Previously, I have reported a so-called counterfactual analysis of the outcome for the Swedish economy from a policy rate from June/July 2010 of 0.25 percent instead of the Riksbank’s rate increases and higher policy-rate path. As far as can be judged, the outcome would have been much better. Inflation would have been much higher and very close to the target, and unemployment would have been much lower and closer to a reasonable long-run sustainable rate. In addition – perhaps somewhat surprising for some – the debt ratio would have been somewhat lower, not higher. This analysis has recently been criticized by Per Jansson, a member of the Riksbank’s Executive Board. But his criticism takes an unusual and unexpected form. Jansson does not question the actual calculation of the effects of a low policy-rate path, and he does not present any new and better analysis. Instead, according to his view, such a low policy rate was “simply not realistic.”

In my world, such a policy [with a policy rate of 0.25 percent from June/July 2010] is simply not realistic, and it is hence excluded as a meaningful comparison.

The new Board member Cecilia Skingsley has on Swedish Television expressed herself in similar terms. But Jansson and Skingsley are guilty of an error in their thinking, by mixing two very different ways of evaluating monetary policy.

One way, so-called ex post analysis, evaluates monetary policy after the outcome, that is, after the event. Such an analysis compares the actual policy and its outcome and target fulfillment with a counterfactual policy and its outcome and target fulfillment. It is such an ex post analysis that I have done.

The other way, so-called ex ante analysis, evaluates the policy, taking into consideration only the information available to the policymaker at the time of the decision. Such an analysis considers whether the Riksbank, given its information at the time of the decision, made reasonable forecasts of inflation, unemployment and other variables, and whether the Riksbank, given these forecasts, made the decision about the policy rate and policy-rate path that seemed to lead to the best target fulfillment. It seems to be such an ex ante analysis that Jansson (and Skingsley) are referring to. Mixing the two kinds of analysis leads to considerable confusion of the issue. Here I try to sort out the issue. It turns out that Jansson’s (and Skingsley’s) reasoning does not withstand scrutiny. Continue reading →

Ekonomistas post on a new report worth reading, “Hushållens skuldsättning och bostadsmarknaden” (“Household indebtedness and the housing market”, in Swedish).

New Ekonomistas post: “Nya data om hushållens skulder” (“New data about Swedish household debt,” in Swedish). A comment on the recently published report of the Government Commission of Inquiry on Overindebtedness (unfortunately only available in Swedish). Using new detailed data, the Commission confirms previous results on more aggregated and partial data. The Commission concludes:

The large loans mostly belong to groups that can be expected to have better conditions for handling large loans, such as those with high incomes and high education.

The largest loans are strongly concentrated to households with the highest incomes.

Ekonomistas post (in Swedish) about worthwhile readings lately about the Rikbank. Here in English (except Wolodarski’s column): Continue reading →

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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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 →

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 →

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 →