Category Archives: New

Why is household debt an additional reason for fulfilling the inflation target? (Updated June 2014)

Updated June 2014, with data of May 2014.

New Ekonomistas post. Here is an English translation.

Why is household debt an additional reason for the Riksbank to fulfill the inflation target? That is, in addition to the strong reason that the inflation target of 2 percent is how the legislated price-stability objective has been made operational. Well, this is because households expect inflation approximately equal to the target. If then inflation is allowed to fall below the target, the households suffer an unexpected and unwelcome capital loss on their debt, in the form of a higher real debt, compared if inflation had equaled the target. Currently, this capital loss is considerable, for instance, SEK 50 000 for each SEK million borrowed in the fall of 2011, and SEK 90 000 for each SEK million borrowed in the spring of 2003. The capital loss leads to an unexpected and unwelcome increase in households loan-to-value ratios and a reduction of their net worth, and the households’ resilience to disturbances is reduced, compared to if inflation had been 2 percent. Continue reading →

A housing-price bubble, according to Roubini and Shiller? Facts about Swedish housing prices and disposable income (updated June 2014)

Updated June 15, 2014 with the latest available data: April 2014 for housing prices and 2014Q1 for disposable income. Updated July 29, 2014, with a figure showing nominal housing prices and nominal disposable income separately.

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

In a post on Project Syndicate,  Noriel Roubini warns about a Swedish housing-price bubble. He writes:

Signs that home prices are entering bubble territory in these economies include fast-rising home prices, high and rising price-to-income ratios, and high levels of mortgage debt as a share of household debt.

According to the Swedish daily Svenska Dagbladet, November 7, the Nobel laureate Robert Shiller says:

I believe people here in Sweden have an illusion that rising prices is a long-run trend, it is reminiscent of a bubble.

But what are the facts about Swedish housing prices? Are they rising fast, in real terms and in relation to disposable income? The fact is that they have fallen relative to disposable income and were in April 2014 still 7 percent lower relative to disposable income than six and a half years ago, in the fall of 2007. Continue reading →

Shall monetary policy be used in an attempt to affect indebtedness (in Swedish)

“Ska penningpolitiken användas för att försöka påverka skuldsättningen?” (“Shall monetary policy be used in an attempt to affect household indebtedness?”, in Swedish), my discussion at a seminar on December 5, 2013, in the Swedish Parliament,  where an excellent report by Evidens, “About household indebtedness and the housing market” (“Om hushållens skuldsättning och bostadsmarknaden,” in Swedish), was presented.

New data about Swedish household debt (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.

Leaning Against the Leaners

Article in Central Banking 24-2 (November 2013) 27-36.

There is much debate in Sweden and further afield about the use of monetary policy – rather than macro- and micro-prudential tools – to ‘lean against the wind’ as a way of preventing dangerous bubbles building up in economies. This article looks at whether, under a mandate of flexible inflation targeting, household debt should be introduced as an additional target for monetary policy. It also reviews how to conduct policy evaluation, drawing on six years of experience gained as a policymaker at the Sveriges Riksbank.

“Leaning Against the Wind” Leads to a Higher (Not Lower) Household Debt-to-GDP Ratio

New revision, November 2013.
Vox column: “The Riksbank is wrong about the debt: Higher policy rates increase rather than decrease the household-debt ratio,” September 3, 2013.

Abstract

“Leaning against the wind” — a tighter monetary policy than necessary for stabilizing inflation
around the inflation target and unemployment around a long-run sustainable rate — has been
justified as a way of reducing household indebtedness. But, under realistic assumptions, it
actually has the opposite effect; it leads to higher real household debt and a higher household
debt-to-GDP ratio. The reason is that a tighter policy than a baseline induces a relatively slow
fall below the baseline of total nominal (mortgage) debt but a faster fall in the nominal price
level and nominal GDP. There is then first a rise in real debt and the debt-to-GDP ratio relative
to the baseline, a rise that is almost as large and as fast as the fall in the price level and nominal
GDP. Then, real debt and the debt-to-GDP ratio slowly fall back to the baseline during a few
additional years. Therefore, “leaning against the wind” as a way of reducing the household
debt-to-GDP ratio is counterproductive.

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