Vox column: “Leaning against the wind,” debt deflation, and the Riksbank

Leaning-against-the-wind monetary policy may lead to a Fisherian debt deflation, since it may lower prices below the anticipated level and therefore raise real debt above what was anticipated. This is what the Riksbank has done by keeping average inflation significantly below the inflation target for a long period. This has caused household real debt to be substantially higher than it would have been if inflation had been on target. Link to Vox column.

Housing prices – nominal, real, and relative to disposable income

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

There is a lot of talk about housing prices in Sweden. As Jesper Hansson has noted in an Ekonomistas post recently (the post is in Swedish), the news becomes misleading if it reports housing-price growth that neglects the seasonal pattern and seasonal adjustment. It is also common to show graphs of nominal housing prices that give a misleading impression. Graphs of real housing prices and housing prices in relation to disposable income give a more balanced impression. Continue reading →

The Riksbank causes “debt deflation”

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

A dangerous thing concerning debt is what Irving Fisher (1933) called ”debt deflation.” It is usually described as deflation causing the real value of nominal debt to increase. Loan-to-value and loan-to-income ratios also increase, since the debt is fixed in nominal terms but the nominal value of assets and income fall. This may hurt the economy through bankruptcies, deleveraging, and fire sales.

But the important thing with the concept of “debt deflation” is not deflation, that is, negative deflation. The important thing is that the price level becomes lower than previously anticipated. This implies that real debt and loan-to-value and loan-to-income ratios become higher than anticipated and planned for. Everyone has probably not realized that this is something that the Riksbank has caused by neglecting the objective of price stability and conducting a monetary policy that has resulted in inflation below target. Continue reading →

Is the Riksbank neglecting the price-stability objective? If so, what are the costs?

New Ekonomistas post. This is an English translation:

What is meant by “without prejudice to the objective of price stability” when the Riksbank has an inflation target? How do we know whether or not the Riksbank is neglecting the price-stability objective? Could it be that the Riksbank is not only neglecting the price-stability objective but is also counteracting the Riksdag’s and the Government’s high-employment objective as well as increasing household indebtedness? Continue reading →

The result of Riksbank monetary policy: Too low inflation, too high unemployment, and somewhat higher (not lower) debt ratio

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

The Riksbank has conducted a monetary policy that has led to far too low inflation, far too high unemployment, and to a somewhat higher (not lower) debt ratio compared to if the policy rate had been left at 0.25 percent from the summer of 2010 until now. This is not a good result.

Inflation in Sweden is since a year far below the target, and unemployment is far above any reasonable estimate of a long-run sustainable rate. Target achievement for monetary policy is thus bad.

An obvious question in the light of the bad target achievement is whether monetary policy could have been conducted in a different way, such that target achievement would have been better. How would target achievement have been with a more expansionary policy during the last few years? This question can be answered with a so-called counterfactual analysis with the Riksbank’s model Ramses. Continue reading →

The Riksbank is wrong about the debt – a higher policy rate increases (not reduces) the household debt ratio

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

In the last few years, the Riksbank has conducted a monetary policy that has led to substantially lower inflation than the inflation target and unnecessarily high unemployment. The Riksbank has more recently justified this policy by maintaining that a lower policy rate would increase the household debt ratio (the ratio of debt to disposable income) and thereby any risks associated with the debt. But the Riksbank has not presented any analysis of how monetary policy and the policy rate affect household indebtedness. It has simply taken as given that a higher policy rate leads to a lower debt ratio than a lower policy rate.

But does a higher policy rate really lead to a lower debt ratio? I have examined this issue in a new paper entitled “‘Leaning against the wind’ increases (not reduces) the household debt-to-GDP ratio.” The paper shows that a higher policy rate leads to a higher debt ratio, not a lower one. This result may be surprising to some, at least at the Riksbank, which has apparently made a sign error in its assumptions. The result is actually quite easy to understand once one carefully considers how debt, GDP and inflation are affected by a higher policy rate. Continue reading →