Debt Dynamics and Monetary Policy: A Note

Stefan Laséen () and Ingvar Strid ()
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Ingvar Strid: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

No 283, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

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 (search for similar items in EconPapers)
JEL-codes: C32 E21 E31 E32 E44 E52 R21 R31 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2013-12-01
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0283

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