Debt Dynamics and Monetary Policy: A Note

Sveriges Riksbank Working Paper Series No. 283

Riksbank Research Paper Series No. 114

34 Pages Posted: 9 Jul 2014

See all articles by Stefan Laseen

Stefan Laseen

Sveriges Riksbank - Monetary Policy Department

Ingvar Strid

Sveriges Riksbank

Date Written: December 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. 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.

Keywords: House prices, Mortgage Debt, Monetary policy, Bayesian Estimation, Structural VAR

JEL Classification: C32, E21, E31, E32, E44, E52, R21, R31

Suggested Citation

Laseen, Stefan and Strid, Ingvar, Debt Dynamics and Monetary Policy: A Note (December 2013). Sveriges Riksbank Working Paper Series No. 283, Riksbank Research Paper Series No. 114, Available at SSRN: https://ssrn.com/abstract=2456215 or http://dx.doi.org/10.2139/ssrn.2456215

Stefan Laseen

Sveriges Riksbank - Monetary Policy Department ( email )

S-103 37 Stockholm
Sweden

Ingvar Strid (Contact Author)

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

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