The Riksbank is wrong about the debt: Higher policy rates increase rather than decrease the household-debt ratio
Lars E.O. Svensson 04 September 2013
The Riksbank maintains high policy rates since it fears that a lower rate would increase the household-debt ratio. This column argues that a higher rate in fact leads to a higher debt ratio, not a lower one. The higher rate reduces nominal housing prices and new mortgages, but since the new mortgages are such a small share of total mortgages, the total nominal debt falls very slowly. Yet nominal GDP falls much faster, so the debt-to-GDP ratio rises.
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.
Sweden, Riksbank, household debt
The audit society and its enemies
Niklas Bengtsson, Per Engström 28 October 2014
Critics of the ‘audit society’ and the so-called ‘new public management’ doctrines have gained momentum in recent years. At the centre of the critique is the so-called motivation crowding-out hypothesis. This column presents evidence from a field experiment involving Swedish non-profits. Far from crowding out intrinsic motivation, the threat of an audit improved all aspects of efficiency.
In the second season of The Wire, thirteen dead women are discovered in a cargo container in Baltimore. Being a case with a low probability of being solved, the different managers of the police force immediately start arguing over which department is responsible for investigating the issue. The incentives are clear – whoever gets the case will have poor statistics to show when the management of the department is audited at the end of the year. The consequence is bribes, corruption, and a dysfunctional police force.
Frontiers of economic research
agency, motivation, motivation crowding-out, intrinsic motivation, incentives, performance-related pay, trust, audits, Sweden, non-profits, charity
Quantifying the macroeconomic effects of large-scale asset purchases
Karl Walentin 11 September 2014
Central banks have resorted to various unconventional monetary policy tools since the onset of the Global Crisis. This column focuses on the macroeconomic effects of the Federal Reserve’s large-scale purchases of mortgage-backed securities – in particular, through reducing the ‘mortgage spread’ between interest rates on mortgages and government bonds at a given maturity. Although large-scale asset purchases are found to have substantial macroeconomic effects, they may not necessarily be the best policy tool at the zero lower bound.
Central banks have used various unconventional monetary policy tools since the onset of the financial crisis yet the debate continues regarding their efficiency. This column attempts to shed light on the ‘bang for the buck’, or the macroeconomic effects, of one such unconventional monetary policy – the Federal Reserve’s large-scale asset purchases of mortgage-backed securities employed during the Fed’s QE1 and QE3 programs.
Global crisis Monetary policy
monetary policy, unconventional monetary policy, large-scale asset purchases, central banking, financial crisis, Federal Reserve, quantitative easing, mortgage-backed securities, term premia, zero lower bound, interest rates, US, UK, Sweden, mortgages, global crisis
Inheritance flows in Sweden, 1810–2010
Jesper Roine, Henry Ohlsson, Daniel Waldenström 08 August 2014
The extent to which lifetime incomes are determined by inherited wealth is a politically sensitive issue, but long-run evidence on this question is limited. This column presents evidence on Swedish inheritance flows since the early 19th century. Despite a long history of aristocracy, accumulated capital was small relative to income in pre-industrial Sweden. In more recent times, Sweden stands out as a country where the return of capital has not automatically translated into a return of inherited wealth.
Thomas Piketty’s book Capital in the Twenty-First Century (Piketty 2014) has received enormous attention since its publication. A fundamental question raised is whether a person’s lifetime income is the result of his or her own efforts or, alternatively, founded on inheritance. Even for those who believe that inequality does not matter as long as it is based on one’s own effort, the potential of a return to high levels of inequality based on inheritance is a totally different matter. To many people, such a development would be much less acceptable than increased inequality per se.
Economic history Europe's nations and regions Poverty and income inequality
Sweden, Inequality, inheritance, wealth, capital, capital accumulation
Winners of a European banking union
Dirk Schoenmaker, Arjen Siegmann 27 February 2013
So far, discussions around Europe’s prospective banking union have focused only on the supervision of banks. This column argues that policymakers must also think about the resolution of banks in distress. While national governments confine themselves to the domestic effects of a banking failure, a European Resolution Authority could incorporate domestic and cross-border effects. A cost-benefit analysis of a hypothetical resolution of the top 25 European banks shows that the UK, Spain, Sweden, and the Netherlands would be the main winners.
The aim of the prospective banking union is to foster financial stability in Europe. The euro sovereign debt crisis has shown that financial stability cannot be managed effectively at the national level, because of the diabolic loop between national governments and banks (Alter and Schüler 2012). A truly integrated European-level banking system can do much to stabilise the Eurozone by breaking this diabolic loop.
EU institutions EU policies Europe's nations and regions
Sweden, Spain, UK, Netherlands, Bailouts, Eurozone crisis, banking union
Fiscal consolidation in Sweden: A role model?
Martin Flodén 25 September 2012
As is well known among economists, Sweden had its own financial crisis in the early 1990s and their public finances were quickly consolidated. This column asks whether the Swedish policy measures serve as a role model for how to handle the current crisis?
Twenty years ago, in September 1992, the Swedish central bank raised its policy rate to 500% in an attempt to defend the fixed exchange rate during the European currency crisis. The Swedish economy was then already in the midst of a severe economic crisis.
Europe's nations and regions Global crisis International finance
Sweden, financial crises, Eurozone crisis
The curse of advanced economies in resolving banking crises
Luc Laeven, Fabian Valencia 09 July 2012
Do advanced economies have an edge in resolving financial crises? This column shows that the record thus far supports the opposite view, with the average crisis lasting about twice as long as in developing and emerging market economies. It argues that macroeconomic stabilisation policies in advanced countries often delay the necessary financial restructuring.
Countries typically resort to a mix of policies to contain and resolve banking crises, ranging from macroeconomic stabilisation to financial sector restructuring policies and institutional reforms. However, despite many commonalities in the origins of crises (Reinhart and Rogoff 2009), existing crisis management strategies have been met with mixed success.
Global crisis Macroeconomic policy
Sweden, Japan, financial crises, banking crises, global crisis, Eurozone crisis
What can Europe learn from Sweden? Four lessons for fiscal discipline
Lars Calmfors 12 March 2012
Several Eurozone countries are currently struggling with acute fiscal crises. This column argues that Sweden provides an example that fiscal transparency and a high-quality economic policy debate may be more important for budget discipline than formally binding rules and automatic correction mechanisms as being envisaged in the European fiscal compact.
Several Eurozone countries are currently struggling with acute fiscal crises (eg Corsetti and Müller 2012). At the same time, the new fiscal compact is an attempt to beef up fiscal frameworks for the future. In order to judge both the fiscal consolidation efforts and the reforms, comparisons with economies that have in the past carried through such processes successfully are helpful.
Sweden, fiscal policy, fiscal crises
Can education policy be used to fight crime?
Randi Hjalmarsson, Helena Holmlund, Matthew Lindquist 29 November 2011
How should society fight crime? This column argues education policy should be part of the answer. Exploiting a Swedish education reform as a source of exogenous variation in years of education, it suggests that one additional year of schooling decreases the likelihood of conviction by 7.5% for males and by 11% for females.
How should society fight crime? Should we adopt tough-on-crime policies that increase monitoring and lengthen prison sentences? Or should we adopt a softer strategy aimed at alleviating poverty and combating discrimination?
In the past decade, economists have entered this ongoing debate in earnest. An excellent example of this new engagement is Cook and Ludwig (2011), which proposes three concrete policies for fighting crime:
The importance of exports and services trade re-evaluated
Henrik Isakson 25 June 2011
In a world economy dominated by fragmented supply chains and trade in tasks, the direct contribution of exports to any national economy is overstated by gross-value measures. Since most measures do not properly account for imported inputs and severely underestimate the share of services in total exports, our view of world trade is distorted. This column says our trade policies risk being distorted too.
It took some time before the concept of vertical specialisation, coined by Hummels, Ishii, and Yi in 2001, reached a broader non-academic audience. Estimating the import content of exports was not something that bothered policymakers. Today however, this formerly academic exercise is at the core of the debate in the trade policy community. New trade statistics are being calculated and estimated.
Sweden, exports, supply chains, Services trade