Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/103827
Authors: 
Laséen, Stefan
Strid, Ingvar
Year of Publication: 
2013
Series/Report no.: 
Sveriges Riksbank Working Paper Series 283
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. In a recent paper Lars Svensson claims that this policy is counterproductive, since a higher policy rate actually leads to an increase (and not a decrease) in real debt and the debt-to-GDP ratio. In this note we offer some comments and extensions to Svensson's analysis. In particular, we take Svensson's debt model to the data and show that it provides an incomplete account of short term debt dynamics. Further, the overall analysis of the effects of monetary policy on debt rests on the rather strong assumption that debt is independent of the policy rate, conditional on housing prices. The policy responses advocated by Svensson can therefore be questioned. More importantly, our exercises with a modified model of debt dynamics enables further understanding of how different assumptions affect the assessment of the effects of monetary policy on debt.
Subjects: 
House prices
Mortgage Debt
Monetary policy
Bayesian Estimation
Structural VAR
JEL: 
C32
E21
E31
E32
E44
E52
R21
R31
Document Type: 
Working Paper

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