SPEECH
SVERIGES RIKSBANK
DATE:
16 May 2017
SE-103 37 Stockholm
(Brunkebergstorg 11)
SPEAKER:
Governor Stefan Ingves
VENUE: Swedish Economics Association
Tel +46 8 787 00 00
Fax +46 8 21 05 31
registratorn@riks bank.se
www.riksbank.s e
Monetary policy challenges - weighing
today against tomorrow*
I'd like to begin by thanking you for the opportunity to come here to the Swedish
Economics Association. As many of you know, this is a tradition, and today's
speech is my twelfth in a row. I have always appreciated the opportunity to come
here and discuss both current issues and long-term themes of more fundamental
significance for the Riksbank's operations.
Today's speech is about monetary policy and its challenges in a slightly longer
perspective. But before broaching that subject, I would first like to comment on
the news item published by the Riksbank this morning. In brief, it states that the
Executive Board is considering switching over to a new target variable, the CPIF,
this autumn, and introducing a 'variation band' to illustrate uncertainty over the
development of inflation.
Ever since the inflation target was introduced nearly 25 years ago, it has been
defined as the annual change in the consumer price index, the CPI. However, in
recent years, the CPI has become increasingly difficult to use as guidance for
monetary policy. The reason for this is that adjustments to the policy rate have
large and direct effects on the CPI which are not connected to underlying
inflationary pressures and which are also counter-productive. This means, for
example, that interest rate cuts, which are intended to bring inflation up, instead
further lower CPI inflation over the short term as the costs for mortgages fall. For
this reason, the CPIF, i.e. the CPI with a fixed interest rate, has increasingly acted
as guidance for monetary policy. But large variations in the CPI in recent years,
due to adjustments to the policy rate, have sometimes led to problems in
communication. By switching to the CPIF, we are making monetary policy clearer.
The target is that the annual change in the CPIF shall be 2 per cent. However, it is
not possible for the Riksbank to achieve this target every single month, so, for
various reasons, inflation will vary around 2 per cent. To illustrate this uncertainty,
the Riksbank is considering the use of a so-called variation band for the CPIF
outcomes in its future communication. The variation band is +/- 1 percentage
point around the target of 2 per cent, which captures almost three-quarters of
CPIF outcomes since 1995. The design of the variation band is thus linked to the
historical development of inflation and should therefore be reviewed as
necessary.
As I see it, the changes now being considered do not entail any change to the
monetary policy being conducted. For some time, the CPIF has functioned as the
Riksbank's operational target variable. We are now considering formalising this
practice by allowing the inflation target to be defined as an annual change in the
CPIF of 2 per cent. The aim of monetary policy will continue to be the stabilisation
of inflation at 2 per cent. In other words, the proposed variation band is not a
socalled target range.1 This means that the Riksbank will always strive towards 2 per
cent inflation, regardless of whether inflation is inside or outside the variation
band.
Our deliberations are now being referred for consultation. If we adopt a new
target variable and variation band, these changes are expected to be applied as
from the autumn.
Unusual times create new challenges
The Swedish economy is going through unusual times. We have good growth, high
resource utilisation and inflation is rising and approaching the target of 2 per cent.
But despite good economic activity, monetary policy is still expansionary. We have
a negative policy rate and have carried out extensive purchases of government
bonds to hold longer-term interest rates down as well.
Maintaining confidence in the inflation target is the main task of monetary policy.
A challenge for monetary policy in recent years has been to push up the
excessively sluggish inflation rate, which is one explanation for the expansionary
policy. By doing so, we can correspond with the expectations of all the
participants in the Swedish economy who base their calculations on the fact that
we are aiming for a fixed target. The inflation target has been a cornerstone of the
Swedish economy for twenty years, it is well known and established and helps to
boost confidence in the Swedish economy.
The Riksbank's forecasts indicate that monetary policy will continue to be
expansionary with low interest rates in the period ahead in order to stabilise
inflation around the target. But this could also bring new challenges with it.
Continued low interest rates could lead to the policy rate hitting its lower bound
more often, thereby making it more difficult to stimulate the economy when
economic activity weakens and inflation is below target. In such a case, it could be
necessary to implement other measures, both from the Riksbank and from other
policy areas.
A persistent low interest rate environment also risks leading to the continued rise
of indebtedness among mortgage borrowers, making them more sensitive to
interest rate changes. This means that they could be affected more than others
when the policy rate needs to be raised. This would be unfortunate as monetary
policy probably works best when it affects the entire economy in a similar way.
Furthermore, low interest rates for a long time entail increased risks to the
financial system and financial stability. And, as a stable financial system is a
prerequisite for successful monetary policy and financial policy, monetary policy
in our present situation needs to be supplemented by, among other things, a
wellfunctioning macroprudential policy.
An important question in this context is what formal role the Riksbank should
have in the work to reduce risks and vulnerabilities in the financial system. The
Riksbank's responsibility for financial stability is expressed in the legislation as the
task of "promoting a safe and efficient payment system". More specific details are
not given. In my opinion, the Riksbank's responsibility - in common with a
number of other central banks - should include financial stability and this should
be clarified in the Sveriges Riksbank Act. I hope that this is dealt with at the
committee stage of the review of the monetary policy framework and the
Sveriges Riksbank Act.
The Swedish banking sector is large by international standards and strongly
concentrated on a small number of major banks that are dependent on foreign
funding - about half of their funding is in foreign currency. This poses a further
risk to financial stability. The Riksbank therefore needs to hold a foreign currency
reserve that is large enough to satisfy the needs that arise in a financial crisis, in
other words the currency reserve needs to be at least as large as it is today.
Another challenge that monetary policy needs to relate to is the free movement
of capital. In combination with a rapid financial development, this has led to asset
prices, indebtedness and exchange rates being increasingly affected by monetary
policy in the major currency areas. This has progressively limited the degree of
freedom for monetary policy in smaller economies. How to increase the degree of
freedom for monetary policy, by, for example, implementing macroprudential
policy measures that could put a dampener on indebtedness, is being discussed
internationally. This is highly relevant for Sweden and I have brought this matter
up in several of my previous speeches to the Swedish Economics Association. I will
also return to this problem today.
Conducting monetary policy is about being constantly prepared to meet new
types of challenges and economic problems. Low interest rates are needed today
in order to stabilise inflation at around 2 per cent, but they must be weighed
against the risks of low rates over a longer period. This is very much the theme of
my speech here at the Swedish Economics Association - weighing the effects of
monetary policy today against the effects tomorrow and what challenges this
creates. But I thought I'd start by discussing the downward trend in global interest
rates and what this means for monetary policy, as it is important to realise that
the problems we are grappling with in Sweden are very much influenced, and
shared, by the world around us.
Downward trend in global interest rates
The financial crisis that broke out in the autumn of 2008 was preceded by a
seemingly calm and stable period of low inflation and good economic growth. The
period is normally referred to as The Great Moderation. This positive
development can be attributed to a number of factors. Ever-faster globalisation
led to greater movement of goods, services, labour and capital among countries.
This, in combination with various deregulations increased competition on labour
and goods markets, contributing to higher economic growth. Increasingly
independent central banks focused on achieving low and stable inflation are also
considered to have contributed to the positive development.
In retrospect, we can now see that major financial imbalances had built up in
what appeared to be a stable macroeconomic environment. Central bank
monetary policy had successfully stabilised inflation. But this did not prevent the
break-out of the more serious economic crisis since the 1930s. It is now clear that
the financial sector had not been fully able to manage the risks and that
supervision of the financial sector needed to be improved. A more moot point is
whether central bank monetary policy contributed to the build-up of financial
imbalances.2 Had central banks been so focused on stabilising inflation that they
ignored the financial imbalances that were building up? Had the Great
Moderation given rise to overconfidence in the ability of monetary policy to steer
the economy? I believe that both these questions will become increasingly
important in the period ahead. I also believe that they need require further
analysis, although one lesson to be learned in any event is that financial stability
cannot be taken for granted.
We can also establish that the recovery after the crisis has been slower than many
expected. Output per capita in Sweden and in several other countries is only
between 1 and 5 per cent higher than before the break-out of the financial crisis
(see Figure 1(a)). Another example is labour productivity. In Sweden, for example,
labour productivity is around 5 per cent higher than in 2007, which is a slow rate
of increase in a historical perspective (see Figure 1(b)). Once a financial crisis has
broken out, it can hence take a very long time for the economy to recover.
Figure 1. GDP per capita and labour productivity in Sweden and abroad
1(a) GDP per capita 1(b) Labour productivity
110 110
105 105
100 100
95 95
90 90
85 85
80 80
00 02 04 06 08 10 12 14 16 00 02 04 06 08 10 12 14 16
Note. Index, 2007 = 100.
Sources: Bureau of Economic Analysis, Consensus Bureau, Conference Board, Eurostat, Japanese
Cabinet Office, Japanese Statistics Bureau, Office for National Statistics, Statistics Sweden and
Statistics Canada
The long recovery after the crisis is also reflected in the fact interest rates in many
countries are still very low. Central banks reacted quickly when the crisis broke
out and cut policy rates to close to zero to avoid a further deepening of the crisis
(see Figure 2(a)). Inflation also fell sharply in many countries (see Figure 2(b)). This
was partly because the price of oil fell heavily and inflation recovered relatively
quickly to begin with. But since then, it has remained at levels some way below
many central bank targets.
Figure 2. Nominal 3-month interest rate and inflation in Sweden and abroad
2(a) Nominal interest rate 2(b) Inflation
8 6
6 4
4 2
2 0
0 -2
-2 -4
00 02 04 06 08 10 12 14 16 00 02 04 06 08 10 12 14 16
Note. Figure 2(a), per cent. The nominal interest rate refers to three-month treasury bills except in
the euro area, where it refers to EONIA. Figure 2(b), annual percentage change. Inflation refers to
the CPIF for Sweden, the HICP for the euro area and the CPI for the remaining countries.
Sources: Bureau of Economic Analysis, Euribor, Eurostat, Japanese Statistics Bureau, Macrobond,
OECD, Office for National Statistics, Statistics Sweden and Statistics Canada
Global real interest rates have been falling for a long time
Monetary policy in many countries has therefore been characterised by
close-tozero policy rates ever since the onset of the financial crisis. All the major central
banks, along with several small ones, have also large volumes of purchased
government bonds and taken other measures to push down interest rates even
further. One of the explanations for the historically very low policy rates is a
downward trend in global real interest rates, that is, the interest rates obtained
when inflation is subtracted from nominal interest rates.
Most central banks control a short, risk-free nominal interest rate - the so-called
policy rate. This then affects other nominal market rates to households and
companies with longer maturities. The nominal rate has a certain impact on
household consumption and corporate investment and hence on demand in the
economy. But perhaps an even more important role is played by the real interest
rate. Monetary policy is considered to be able to affect the real interest rate in the
short term. This is partly due to the fact that it can take time for companies to
adapt their prices when demand changes. Via the real interest rate, the central
bank can thus influence demand in the economy and by extension inflation.
On the other hand, monetary policy is not considered to be able to affect the real
interest rate over the longer term. Instead, it is then determined by other factors,
such as demographic development, households' valuation of consumption today
compared with in the future, trend growth and, in smaller economies, also by the
international real interest rate level. But the long-term real interest rate plays an
even more important role for rate-setting. If it has fallen, the average policy rate
needs to be lower in order to be able to uphold the inflation target.
It has long been known that real interest rates have shown a falling trend around
the world over the last few decades. The "global" real interest rate, i.e. an average
of real rates for risk-free assets (here measured using ten-year government
bonds) in the major economies, has shown a falling trend of just over 4
percentage points since the end of the 1980s and is currently slightly below 1 per
cent (see Figure 3(a)).
The global real interest rate is important for small, open economies. In a world
with the free movement of capital, it is difficult for a small economy to have real
interest rates that deviate a lot from the global real interest rate level. This does
not mean, however, that the real interest rate in Sweden always has to
correspond exactly to the rate abroad. Deviations can exist both in the short- and
long-term for various reasons. In the short-term, economic activity can develop
differently in Sweden and abroad, which can affect real interest rates. Deviations
can also take place over longer periods, depending, for example, on different
trends in population development or productivity growth. But just as in other
countries, there has been a downward trend in the real interest rate in Sweden.
The real interest rate for two-, five- and ten-year government bonds has fallen
from around 6 per cent at the end of the 1980s to almost -2 per cent today (see
Figure 3(b)).
Figure 3. Global real interest rate and Swedish real interest rates from a
historical perspective
3(a) Global real interest rate 3(b) Swedish real interest rates
6 10
Real interest rate, 2 years
Global real interest rate, 10 years, weighted average (GDP)
Real interest rate, 5 years
8
Real interest rate, 10 years
5
6
4
4
3
2
2
0
1
-2
0 -4
87 91 95 99 03 07 11 15 87 91 95 99 03 07 11 15
Note. Per cent. The broken trend line has been calculated using the HP filter. Real interest rates are
calculated as nominal government bond yields minus actual inflation. The calculation of the global
real interest rates includes the euro area (as of 1995), Japan, Canada, the United Kingdom and the
United States.
Sources: Bureau of Economic Analysis, Eurostat, Japanese Statistics Bureau, Macrobond, OECD,
Office for National Statistics, Statistics Sweden and Statistics Canada
Falling global real interest rates can be caused by secular
stagnation...
Research provides several different explanations for the falling trend in global real
interest rates.3 The explanation that has probably received the most attention
recently is the theory of secular stagnation, developed by the American
economist Lawrence Summers.4 According to him, weaker global demand and
lower growth, which can be long-lasting, lie behind the low level of interest rates.
The weak demand is, in turn, due to various structural factors that have led more
people wanting to save and fewer wanting to invest. Both of these parts tend to
push the real interest rate down.
Demographic factors may provide an explanation for why the willingness to save
has increased. Average life expectancy in the population has risen in both
developed countries and emerging economies in recent decades. This may lead
more people to wish to save for their old age. In a lifecycle perspective, saving is
highest in middle age, when most people's earnings are highest and they are very
motivated to save prior to retirement. So the greater number of middle-aged
people today may thus provide an explanation for the increase in saving. If the
saving is intended for future retirement, one effect of the falling real interest rates
may also be that many people need to save even more to reach their saving
targets.
Another explanation for the increase in saving, particularly during the 2000s, has
been put forward by the former Chairman of the Federal Reserve, Ben Bernanke.5
According to him, the increase in saving that occurred in China and other Asian
emerging economies, as well as in the major oil-producing countries, contributed
to the downward pressure on interest rates. This is because the large current
account surpluses in these regions have been invested on the global capital
markets, resulting in low real interest rates.
The falling trend in real interest rates may also be due to a reduced willingness to
invest. In an article that has attracted much attention, the famous American
economist Robert Gordon claimed that the pace of innovation has declined
sharply since the 1970s.6 In his opinion, growth between 1870 and 1970 was
abnormally high thanks to relatively simple and growth-promoting innovations,
such as electricity and the combustion engine. According to Gordon, it will not be
possible to repeat this growth as today's innovations, such as the Internet and
mobile technology, he says, do not provide any major productivity gains in the
long term. A reduction in global willingness to invest may thus be due to a slower
pace of innovation. This means there are fewer profitable projects in which to
invest.
...but there may also be other reasons
According to the theory of secular stagnation, the falling real interest rates may
be a sign of a shortage of investment opportunities for companies. But has this
actually been the case? One way of investigating this is to study the return on
companies' capital stock.
Figure 4(a) shows the real return on capital in the US between 2000 and 2016. As
can be seen, return has been stable with relatively minor variations around just
below 9 per cent while the real interest rate has shown a falling trend. After the
financial crisis, return on capital has even risen slightly, suggesting good
investment opportunities. Investment growth after the financial crisis is in line
with such a hypothesis. Figure 4(b) shows that investments have risen relatively
rapidly since 2010 and are now close to or above their long-term trend. None of
this is easy to reconcile with secular stagnation.7
Figure 4. Real return on capital, real interest rate and investments in the United
States
4(a) Return on capital and real interest rate 4(b) Investments in the business sector
10 3000
Investments
Investments, nonresidential
8 2500
Real interest rate, 5 years
6 2000
Return on capital
4 1500
2 1000
0 500
-2 0
00 02 04 06 08 10 12 14 85 90 95 00 05 10 15
Note. Figure 4(a), per cent. Return on capital in the business sector. Broken lines show average
return on capital since the year 2000. Real interest rate refers to 5-year real government bonds.
Figure 4(b), USD billion. The broken trend lines have been calculated using the HP filter.
Sources: Gomme et al. (2011), Bureau of Economic Analysis, Federal Reserve and the Riksbank
We can observe that the development in Sweden has been similar. Figure 5(a)
shows that the real return on capital in Sweden between 2000 and 2016 has been
relatively stable with minor variations around slightly below 8 per cent while the
real interest rate has shown a falling trend. Figure 5(b) shows that investment is
also close to or slightly above its long-term trend in Sweden.
Figure 5. Real return on capital, real interest rate and investments in Sweden
5(a) Return on capital and real interest rate 5(b) Investments in the business sector
10 1000
Investments
Real interest rate, 5 years
Investments, nonresidential
Return on capital
8
800
6
600
4
400
2
200
0
-2 0
00 02 04 06 08 10 12 14 16 85 90 95 00 05 10 15
Note. Figure 5(a), per cent. Return on capital in the business sector. Broken lines show average
return on capital since the year 2000. Real interest rate refers to 5-year real government bonds.
Figure 5(b), SEK billion. The broken trend lines have been calculated using the HP filter.
Sources: National Institute of Economic Research, Statistics Sweden and the Riksbank
The real return on capital and the real interest rate should be strongly associated
with each other, i.e. the exact opposite to what we observed in both the United
States and Sweden. A falling real interest rate tends to reduce the cost of
investment, which should increase the rate of investment and thereby decrease
the return on capital. The various premiums that measure the difference in return
on capital and government bond yield should therefore not show a trend, even
though that appears to be the case.
An important factor that can often explain some of the difference between return
on capital and government bond yield is the so-called credit risk premium, which
compensates the investor for the risk of the company going bankrupt. There is
reason to believe, however, that the credit risk premium has been stable as the
number of bankruptcies has been constant or falling.
Another premium is the so-called liquidity premium. Risk-free assets such as
government bonds can often be used as collateral for various loan contracts.
Government bonds and other risk-free assets that can relatively easily converted
into liquid funds therefore have an added value given by the liquidity premium.
The higher the liquidity premium is on an asset, the higher the price and the lower
the yield will be.
The falling trend in the real interest rate should, at least in part, be due to the
premium on government bonds having risen. It is not difficult to find reasons why
this could be the case, particularly not in the period after the financial crisis. The
supply of acceptable collateral on the financial markets decreased when a
significant share of the assets were lost during the financial crisis. The sovereign
debt problems in the euro area may also have reduced the supply of safe assets.
The demand for safe assets may have increased due to new financial regulations,
such as Basel III. Finally, central bank purchases of government bonds reduce
supply on the financial markets.
To summarise - making predictions about future economic development is, as
everyone knows, very difficult. The economic system is complex and new
innovations and changes that are difficult to predict happen all the time. The
theory of secular stagnation was presented for the first time as early as the 1930s
by the American economist Alvin Hansen.8 It proved to be incorrect at that time
9
and I have suggested that there may be reason to still be sceptical about it now.
The current low interest rate environment may very well have been caused by
factors other than secular stagnation and need not therefore be long-lasting.
A look-back in history shows that real interest rates often vary in longer cycles.
They have been on the same low levels as today only to then return to more
normal levels.10 The difficulty we now face is assessing how long this cycle of low
real interest rates will last. This is no easy task even if there is every indication
that they will continue to be low for the foreseeable future. We must remember,
however, that history has also taught us how economic development can
sometimes take unexpected twists and turns.
Future challenges
The global real interest rate continues to be low
I have mentioned a few different possible reasons for the downward trend in the
global real interest rate - demographic factors, lower growth and higher demand
for safe assets. These factors will probably continue to exert an influence in the
period ahead, with lower interest rates as a consequence. In such a case, this
would also be in line with pricing on the Swedish financial markets. The market
pricing of the overnight rate five years ahead is around 1 per cent, which indicates
that the policy rate will continue to be low (see Figure 6). Market participants'
expectations of the policy rate as expressed in surveys indicate similar levels (see
Figure 6).
Figure 6. Overnight rate 5 ahead years according to market pricing and
expectations of the policy rate 5 years ahead
8
Expectations of the repo rate, 5 years ahead
Nominal forward rate, 5 years ahead
7
6
5
4
3
2
1
0
97 00 03 06 09 12 15
Sources: TNS Sifo Prospera and the Riksbank
Increased risks to the financial system
A persistent low interest rate environment may threaten the stability of the
financial system. A stable financial system forms a condition for monetary policy
and also fiscal policy to succeed. If the financial system is threatened, the
government may need to intervene with various support measures. This may be
very expensive, not least in Sweden, considering the size of the Swedish banking
sector.
One lesson from the economic crisis at the start of the 1990s is that healthy public
finances form a condition for achieving good economic development with stable
inflation. To reduce the risks to the financial system and public finances - and,
ultimately, monetary policy - it is therefore important to have a smoothly
functioning regulation of the banking system. The policy area with main
responsibility for counteracting the emergence of financial imbalances and
contributing to the stability of the financial system is macro- and microprudential
policy.
Greater dependence on other monetary policy tools
For monetary policy, continued low real interest rates mean that it may become
more difficult to stimulate the economy only with the use of the policy rate when
economic activity is weakening and inflation is below target. If, for example, the
long-term real interest rate is around zero, at the same time as the inflation target
is 2 per cent, the policy rate will also be around 2 per cent, on average. This does
not provide much scope for interest rate cuts in the event of an economic
slowdown, as the policy rate cannot be cut too far below zero. If the economic
slowdown is large enough, households and companies may also start to believe
that monetary policy's scope is limited and accordingly set their expectations to a
rate of inflation below the inflation target.
Consequently, the monetary policy toolkit, both in Sweden and in other countries,
may also continue to need to include more tools. This may include large-scale
asset purchases, a measure impacting long-term interest rates, expectations of
future short-term interest rates and the amount of money in the economy.11
Another measure that could be used is the publication of forecasts of the interest
rate path, so-called forward guidance, which the Riksbank also does. This year, it
is actually ten years since we started to publish three-year paths for the policy
rate. Other ways of making monetary policy more expansionary could be by
intervening on the foreign exchange market and giving loans directly to
companies via the banks.
Mortgage borrowers more sensitive to interest rate changes
The falling real interest rates are one of the reasons that indebtedness has risen
over the last twenty-year period. Inflation targeting was formally introduced in
1995 when households' debt-to-income ratio - debt in relation to disposable
income - was around 90 per cent. Today, just over 20 years later, indebtedness
has pretty much doubled and is almost 180 per cent.12 The rising indebtedness
and many people choosing a variable interest rate on their mortgages has made
households more sensitive to interest rate adjustments. The importance of
monetary policy for households with high indebtedness, in practice mortgage
borrowers, has therefore become greater.
In an example calculation, four economists from the Riksbank have attempted to
shed light on how an interest rate rise today would affect mortgage borrowers'
consumption, compared with 20 years ago.13 The following scenario could provide
a backdrop to these calculations. To fund loans for housing, the Swedish banks
issue mortgage bonds, among other things. These are partly funded by foreign
investors. If these foreign investors, for whatever reason, should lose confidence
in the Swedish economy and the mortgage bonds, the banks may become very
vulnerable. They may find it more difficult to obtain funding on the international
markets, at the same time as interest rates start to rise. The exchange rate may
start to weaken due to decreased confidence among foreign investors, which, in
turn, could push inflation up. In such a scenario, the Riksbank may be forced to
raise the policy rate to restrain inflation. These rising interest rates would
primarily impact households with large mortgages. They would face higher
mortgage costs and would thus find it more difficult to manage their loans, which
could lead to reduced consumption and demand.
The calculation assumes that the policy rate is raised by one percentage point. At
the current level of indebtedness, mortgage borrowers would have to reduce
consumption by almost two per cent. If indebtedness had instead been the same
as when inflation targeting was introduced 20 years ago, their consumption would
only have decreased by a few tenths of one per cent. Mortgage borrowers'
consumption would thus decrease by a significantly greater degree today,
compared with 20 years ago. The calculation probably also underestimates the
effect on consumption, as variable interest rates are much more common today,
something the example calculation does not consider.
If real interest rates continue to be low, this could lead to indebtedness rising
even more. The interest rate sensitivity of mortgage borrowers will then become
even greater and they may be even more affected than the example calculation
suggests when the policy rate must be raised. This would be unfortunate as
monetary policy probably works best when it affects the entire economy in a
similar way.
However, the fact that interest rate sensitivity is greater today than previously
among mortgage borrowers does not necessarily mean that the impact of
monetary policy has also become greater. Inflation depends on how an interest
rate adjustment affects the overall demand in the economy. This, in turn, depends
on total consumption, which is to say how much mortgage borrowers and other
households consume together. The results from the example calculation indicate
that the impact on inflation is only slightly greater today than it was 20 years ago.
Limited degree of freedom for monetary policy
Rapid financial development, in combination with free capital movement, has led
to the emergence of significant capital flows between different countries when
monetary policy in major currency areas such as the United States and the euro
area is changed. This affects asset prices, indebtedness and exchange rates in a
way that can limit monetary policy's degree of freedom.
In Swede