A new revision, January 2017, is available of the paper “Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy?”
“Amortization Requirements May Increase Household Debt : A Simple Example,” IMF Working Paper No. 16/83, April 2016.
The idea is very simple. If you like to have a mortgage of SEK 2 million the next 10 years, you would take out an interest-only mortgage of SEK 2 million now and keep it for 10 years. However, if you learn that new amortization requirements imply that you have to pay back 2 percent of the initial mortgage every year, you would prefer to borrow SEK 2.5 million now, put the extra SEK 0.5 million in a savings account, and then use withdrawals from the savings account to amortize 2 percent of SEK 2.5 million each year, that is, SEK 50,000 each year and SEK 500,000 in 10 years. Thus, if an LTV cap is not binding you would borrow SEK 2.5 million, or as much as the LTV cap allows you to borrow. Continue reading
“Cost-Benefit Analysis of Leaning Against the Wind : Are Costs Larger Also with Less Effective Macroprudential Policy?” revised January 2017. CEPR Discussion Paper DP11739 (Jan 2017), NBER Working Paper No. 21902 (Jan 2017). Previous versions: IMF Working Paper WP/16/3, January 2016.
“Leaning against the wind” (LAW) with a higher monetary policy interest rate may have benefits in terms of lower real debt growth and associated lower probability of a financial crisis but has costs in terms of higher unemployment and lower inflation, importantly including a higher cost of a crisis when the economy is weaker. For existing empirical estimates, costs exceed benefits by a substantial margin, even if monetary policy is nonneutral and permanently affects real debt. Somewhat surprisingly, less effective macroprudential policy, and generally a credit boom, with resulting higher probability, severity, or duration of a crisis, increases costs of LAW more than benefits, thus further strengthening the strong case against LAW.
“Monetary policy and macroprudential policy: Different and separate,” paper (revised February 2016) and slides presented at the conference “Macroprudential monetary policy,” Federal Reserve Bank of Boston’s 59th Economic Conference, Federal Reserve Bank of Boston, October 2-3, 2015. Forthcoming in Canadian Journal of Economics.
Excel sheet used in slide 21 for the simple example of a cost-benefit analys of leaning against.
Monetary policy should stick to its core mandate of price stability, and should deviate from its traditional role only if the benefits to the economy outweigh the costs, according to a new study from the International Monetary Fund, “Monetary Policy and Financial Stability.”
The question is whether monetary policy should be altered to contain financial stability risks. Should it lend a hand by temporarily raising interest rates more than warranted by price and output stability objectives?
Based on our current knowledge, and in present circumstances, the answer is generally no.
“Inflation targeting and leaning against the wind,” in South African Reserve Bank (2015), Fourteen Years of Inflation Targeting in South Africa and the Challenge of a Changing Mandate: South African Reserve Bank Conference Proceedings 2014. Pretoria: South African Reserve Bank, 19-36. Paper. Slides. Program. Continue reading
New publication: “The Possible Unemployment Cost of Average Inflation below a Credible Target,” American Economic Journal: Macroeconomics 7(1) (2015) 258-296.
Riksbankens mandat bör förtydligas, sysselsättningen ges större vikt, den demokratiska kontrollen av Riksbanken skärpas och koordineringen av penningpolitiken och makrotillsynen förbättras. Det skriver jag i den nya underlagsrapporten Penningpolitik och full sysselsättning för LOs projekt Full sysselsättning och solidarisk lönepolitik. Continue reading
Vox column: Why leaning against the wind is the wrong monetary policy for Sweden, referring to this new paper.
New short paper, “Resilience, Debt, and Net Worth: Has Resilience Increased with Higher Debt-to-Income Ratios?,” January 2014. Continue reading
New publication: “Some Lessons from Six Years of Practical Inflation Targeting,” Sveriges Riksbank Economic Review 2013:3, 29-80. Continue reading