Update, August 2017: “Cost-Benefit Analysis of Leaning Against the Wind,” published in Journal of Monetary Economics
The first version, under the title “Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy?”, was published as IMF Working Paper WP/16/3, January 2016.
Update of previous post, now with data through March 2015 and with HICP inflation. CPIF inflation has an upward bias, since it excludes the effect on inflation of mortgage rates trending down but includes the effect of housing prices trending up. Nevertheless, counter to what is sometimes argued, the Riksbank’s target achievement does not look better with either CPIF and CPIX inflation, or with HICP inflation.
A previous post has been updated with new figures comparing the policy rates, inflation rates, and real policy rates in Sweden, the Eurozone, the UK, and the US. The Riksbank’s real policy rate increased by 3.5 percentage points to plus 1 during 2010-2011, whereas the real policy rates stayed low and negative in the other economies. According to this measure, the Riksbank’s policy was extremely tight during 2010-2013. More recently, the real policy rates has fallen in Sweden and risen in the other economies except the US. 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 “realistc”). 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
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
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