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.

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 →

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?
Continue reading →

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 →