Karolina Ekholm: Monetary policy, business cycle stabilisation and
macroprudential policy
Speech by Ms Karolina Ekholm, Deputy Governor of the Sveriges Riksbank, to a meeting at
the Confederation of Swedish Enterprise, Stockholm, 13 March 2013.
* * *
The views expressed in this speech are my own and are not necessarily shared by the other members of the
Executive Board of the Riksbank. I would like to thank Kerstin Hallsten, Kerstin af Jochnick, Cecilia
RoosIsaksson, Lars E. O. Svensson, Anders Vredin and Barbro Wickman-Parak for their comments and Magnus
Wiberg for help with drafting the speech.
As I am sure most of you know, I have in recent years advocated a more expansionary
monetary policy than the policy that has actually been conducted. That I have done so
recently, when the growth of the Swedish economy has been relatively weak, is perhaps not
so surprising. On the other hand, it may be more difficult to understand the reasons for my
stance in 2010, when the Swedish economy had growth rates of over 5 per cent. However,
as I intend to explain today, I believe that demand has been too low in Sweden ever since
the global financial crisis seriously affected the Swedish economy in the autumn of 2008. The
low level of demand is ultimately the result of weak economic development around the world,
which is subduing the demand for Swedish exports and making households and companies
more pessimistic. In my opinion, however, this could have been counteracted by a more
expansionary monetary policy.
Today I intend to describe the factors that in my view indicate that aggregate demand has
been too low in recent years, and to explain why, as I see it, monetary policy and fiscal policy
have not been used to a greater extent to counteract low demand. My explanation is by and
large that the possibility to use monetary policy and fiscal policy to stabilise aggregate
demand has been limited by concerns about financial stability. Even though Sweden has
coped well with the financial crisis, I believe that it has left decision-makers with the feeling
that they have just had a near-death experience. Financial stability has therefore come to
seem far more important that standard business cycle stabilisation. This prioritisation may
well be reasonable. However, I believe that it is important to the Swedish economy that we
have an effective policy for business cycle stabilisation at the same time as we conduct a
policy to promote financial stability. I will discuss how this should be done towards the end of
my speech.
Low aggregate demand since the financial crisis
When Sweden was hit by a collapse in the demand for Swedish export products at the end of
2008, GDP fell heavily. However, it did not take long for GDP to rise again and in 2010
growth figures reached almost record levels. To a certain extent, these high growth figures
were of course a natural consequence of the major fall in GDP in late 2008 and early 2009.
But, in contrast to many other countries, GDP in Sweden also began to exceed its pre-crisis
level relatively quickly (see Figure 1).
Figure 1. GDP in Sweden and abroad
Index, Q4 2007=100
106 106
UK
Euro area
104 104
USA
Sweden
102 102
100 100
98 98
96 96
94 94
92 92
07 08 09 10 11 12 13
Note. Seasonally-adjusted data
Sources: Statistics Sweden and national sources.
However, despite the relatively favourable development of GDP, it seems that unemployment
has become entrenched at a high level. Initially unemployment increased less than we
expected given the substantial fall in GDP - it peaked at 9 per cent in early 2010 - but since
then it has fallen no lower than 7.6 per cent (see Figure 2). In my view, this is a level that is
much higher than what can be considered a long-run sustainable unemployment rate.1
Figure 2. Unemployment in Sweden
Per cent of labour force
9 9
Average 1999-2012
Unemployment
8 8
7 7
6 6
5 5
05 06 07 08 09 10 11 12 13
Note. Seasonally-adjusted data
Source: Statistics Sweden.
1
Long-run sustainable unemployment rate here refers to the level of unemployment that is expected to prevail
when all cyclical shocks have abated, when ongoing structural changes have had a full impact and when
inflation expectations are equal to the actual rate of inflation. See for example "The long-term development of
the Swedish labour market", Monetary Policy Report, July 2012. See also "Correction of the Riksbank's
estimate of the long-run sustainable employment rate", Appendix 2 of the minutes of the monetary policy
meeting, July 2012, for a discussion of the role of expectations in the assessment of the long-run sustainable
unemployment rate.
Unemployment has also begun to increase again in recent months and our latest forecast
predicts that it will increase further to reach 8.2 per cent in the third quarter of this year.
Figure 3. CPIF inflation in Sweden
Annual percentage change
4 4
3 3
2 2
1 1
0 0
05 06 07 08 09 10 11 12
Note. The series refers to monthly data.
Source: Statistics Sweden.
Developments thus indicate that we have had spare capacity on the labour market since
2008. This is one of the reasons why inflation has been low in recent years. It also appears
that inflation has in principle shown a downward trend since 2008. As the Riksbank's
reporate changes have a major impact on inflation measured in terms of the CPI, it is in this
context most relevant to look at inflation measured in terms of the CPIF, that is the CPI with a
fixed mortgage rate (see Figure 3).
As can be seen in the figure, CPIF inflation was around 3 per cent when the Swedish
economy was hit by the fall in demand at the end of 2008. It is now down to levels of around
1 per cent.
The fact that Sweden has a substantial surplus on its current account, as shown in Figure 4,
also indicates that domestic demand is relatively low.
Figure 4. Current account as a percentage of GDP
Per cent
10 10
8 8
6 6
4 4
2 2
0 0
-2 -2
-4 -4
Spain
-6 -6
Ireland
USA
-8 -8
Sweden
-10 -10
90 94 98 02 06 10
Source: IMF WEO, October 2012.
The current account reflects the difference between the value of what is produced and the
value of what is absorbed in the economy through consumption and investments. It also
shows the difference between total saving and total investment in the economy. The fact that
Sweden has a surplus thus means that saving in Sweden is higher than the level needed to
fund Swedish investments.
An important reason why saving has been relatively high in Sweden since the mid-1990s is
the relatively high level of financial saving in the public sector since the budget consolidation
process carried out in connection with the crisis of the 1990s. Another reason is that the
Swedish households also increased their saving in connection with this crisis. At the same
time, the level of investment in Sweden has been relatively low compared to that in other
countries (see Figure 5). This is largely due to relatively low investments in housing.2
Figure 5. Total investment as a share of GDP
Per cent
30 30
2001-2007
2008-2011
25 25
20 20
15 15
10 10
5 5
0 0
Note. Average value 2001-2007 and 2008-2010.
Source: IMF WEO, October 2012.
The current account surplus has in fact decreased somewhat in recent years. It was
approximately 9 per cent of GDP in 2008 and approximately 7 per cent of GDP in 2011.
However, it is still high in historical terms and in comparison with other countries. It is hard to
see that there are any major advantages for the Swedish households of a significant part of
their incomes being used to fund investments abroad, which in reality is what this means. To
me, this is another sign that demand is too low in Sweden. Low demand is restraining
consumption so that saving is high, and is also restraining investment.
My interpretation of developments regarding the labour market, inflation and the current
account is thus that demand in the Swedish economy has been far too low since Sweden
was hit by the fall in demand in the autumn of 2008. Although both monetary policy and fiscal
policy have been used to counteract the fall in demand, this has not compensated in full for
weak economic development abroad and for the weakening optimism of the households and
companies.
The fact that unemployment was relatively high in Sweden already prior to the financial crisis
(as can be seen in Figure 2, unemployment has averaged just over 7 per cent since 1999)
and that the current account surplus has been substantial since the second half of the 1990s,
raises the question of whether aggregate demand has been weak in an even longer
perspective. My colleague Lars E. O. Svensson has, for example, claimed that
unemployment has been unnecessarily high since the mid-1990s because monetary policy
has not been used to a sufficient extent to counteract shocks that have pushed down
inflation.3 It is of course important to determine what the situation was with regard to resource
utilisation before the financial crisis in order to be able to assess the level that unemployment
should eventually fall to. But this is not the issue that I intend to focus on today: my focus
here is instead on the issue of how economic policy could be used more effectively to
stabilise business cycle fluctuations in the future despite the risks to financial stability.
Limited stimulation from fiscal policy
In contrast to the situation in many European countries and the United States, there was a
significant surplus in public net lending in Sweden when the financial crisis began. In the
euro area and the United States, public net lending as a percentage of GDP had shown an
average deficit of just under 2 per cent during the 10 years before the crisis. The
corresponding figure for Sweden was a surplus of over 1 per cent; in line with the so-called
surplus target.4 The much stronger state of public finances than in many other countries was
largely a consequence of the fiscal policy framework that has gradually been developed
since the 1990s.5 This put Sweden in a much better initial position in terms of its public
finances when the financial crisis began.
Fiscal policy contributes to stabilising business cycle fluctuations without any specific
decisions being made through the so-called automatic stabilisers; that is through the fact that
tax revenues fall and expenditure for various grants and benefits increases automatically
when economic activity declines and unemployment increases.6 However, in addition to this,
active decisions can also be made that affect revenues and expenditure. Despite the severe
downturn in 2008-2009, public net lending in Sweden fell to only -1 per cent of GDP in 2009.
This is much less than in the euro area, the United Kingdom and the United States (see
Figure 6).
Public indebtedness has increased substantially in the United States and in many European
countries in recent years, partly as a result of the automatic stabilisers and partly as result of
government intervention in the financial sector to deal with systemically-important banks that
have experienced problems. In these countries, the scope to influence the economy using
fiscal-policy stimulation measures is therefore very limited today. The countries that have the
weakest public finances in Europe are forced to implement tightening measures despite the
weak state of their economies because the high level of debt is creating uncertainty about
the ability of the countries to repay further loans. In Sweden, on the other hand, there is
scope for active fiscal-policy stimulation measures if they were needed.
Figure 6. Public sector net lending in Sweden, the euro area
and the United States
Per cent of GDP
4 4
2 2
0 0
-2 -2
-4 -4
-6 -6
-8 -8
-10 -10
UK
Euro area
-12 -12
USA
Sweden
-14 -14
99 00 01 02 03 04 05 06 07 08 09 10 11
Source: IMF WEO, October 2012.
It is important in this context to remember that the primary aim of the fiscal-policy framework
that we have in Sweden is to make public finances sustainable in the long term. Prior to the
financial crisis, the greatest threat to the long-term sustainability of public finances appeared
to be an ageing population.7 An ageing population increases the demands on the public
sector at the same time as the extent to which the sector can be funded by taxes on
employment income decreases.
However, the experience gained in countries where the need to rescue
systemicallyimportant banks has exerted great pressure on public finances has given us a somewhat
different perspective. In a country like Sweden, which has a large banking system in relation
to the size of the economy, a banking crisis could quickly have a devastating effect on public
finances. Given this, the risk of a financial crisis is therefore perhaps the greatest potential
risk to the long-term sustainability of public finances. The need to save for a rainy day also
probably appears to be greater as it is much easier to manage a financial crisis if public
finances are strong from the outset. It is for this reason that I believe that the willingness to
use fiscal policy to stimulate demand in the economy is limited by concerns about financial
stability.
At present, therefore, we should probably not expect fiscal policy to contribute much more
than the effects of the automatic stabilisers when it comes to stimulating the Swedish
economy. The Riksbank's forecast is that public net lending will be negative at -1.1 per cent
of GDP this year. However, it is expected to gradually increase to 0.3 per cent of GDP in
2015 as economic activity improves.
The fact that fiscal policy is not contributing more actively to stimulate demand in the
economy is, however, completely in line with the established procedure for stabilisation
policy in Sweden as I perceive it. In my view, the main responsibility for active business cycle
stabilisation has lain with monetary policy since the crisis of the 1990s.8 However, this view is
based on a flexible interpretation of our inflation target in the sense that the target comprises
a stabilisation of the development of the real economy.9
Too little stimulation from monetary policy
Monetary policy also became much more expansionary when demand in the Swedish
economy fell rapidly in late 2008 and early 2009. Between October 2008 and July 2009, the
repo rate was cut by a total of 4.5 percentage points to the record-low level of 0.25 per cent,
and it remained at this level for a year (see Figure 7).
Figure 7. Policy rates in Sweden, the euro area, the United States
and the United Kingdom
Per cent
6 6
UK
Euro area
USA
5 5
Sweden
4 4
3 3
2 2
1 1
0 0
07 08 09 10 11 12 13
Sources: The Riksbank and national sources.
However, the Riksbank began to raise the repo rate in July 2010 and in July 2011 it was at
2.0 per cent. Since then, the repo rate has been cut again in a number of steps to 1.0 per
cent as the weak development in the euro area has had a negative impact on the Swedish
economy. As can be seen in Figure 7, policy rates in the United States and the United
Kingdom have remained close to zero throughout this period. The ECB began to raise the
policy rate in the euro area in 2011, but quickly had to begin cutting it again.
Many central banks have also conducted so-called unconventional monetary policy by
purchasing assets or providing liquidity at longer maturities than normal in other ways.10 All in
all, this has led to a more expansionary monetary policy in large parts of the rest of the world
than in Sweden, despite the fact that the repo rate is at an historically low level.
The fact the Swedish monetary policy has been less expansionary than in many other
countries may seem reasonable considering that the Swedish economy has also performed
much better than that of many other countries. This is particularly true in comparison with
other European countries, as shown in Figure 1. But, it is a problem that monetary policy has
not been expansionary enough to keep inflation at a rate of around 2 per cent and to bring
11
unemployment down to a long-run sustainable rate.
Why hasn't monetary policy been expansionary enough? One reason is that to a certain
extent we overestimated the strength and duration of the temporary recovery in the Swedish
economy in 2010 and therefore also overestimated inflationary pressures. Another reason is
the fear that a more expansionary monetary policy would increase the risks associated with
household indebtedness. Here, it is once again the events in other countries during the
financial crisis that have given rise to such fears. In several countries with a high level of
household indebtedness and high housing prices, substantial falls in housing prices have led
to a fall in consumption demand, which in turn has weakened the development of the real
economy. In some areas, this has also led to higher loan losses and risks to financial
stability.
Risks associated with household indebtedness
Personally, however, I do not believe that the risks associated with household indebtedness
have represented a weighty argument against conducting a more expansionary monetary
policy recently. There is of course every reason to avoid a situation in which housing prices
fall dramatically. However, I find it difficult to see that current developments regarding
housing prices and loans to households in Sweden are such that they justify further
measures.
Housing prices and the households' debts as a percentage of their disposable incomes rose
substantially in Sweden from the mid-1990s until the start of the financial crisis. As can be
seen in Figure 8, real housing prices also increased dramatically in the other Nordic
countries in this period. However, the situation has been different in recent years. The rate of
growth in loans to households has fallen significantly and the debt ratio has therefore levelled
out, although at an historically high level (see Figure 9). Increases in housing prices have
also been much more subdued in recent years. As in Finland, real housing prices seem to
10
In the United States, the central bank has added liquidity to the markets by purchasing bonds. The central
banks in the United Kingdom and Japan have also launched extensive asset-purchase programmes. The ECB
has offered loans to European banks in the form of three-year LTRO loans (Long-term Refinancing
Operations). The ECB has also announced a new support programme, Outright Monetary Transactions (OMT)
which enables unlimited purchases of government bonds in countries that apply for emergency loans and thus
accept the conditions for such loans.
11
In the Monetary Policy Report published in July 2012, the Riksbank's assessment was that the long-run
sustainable unemployment rate is in the interval 5-7.5 per cent. The mid-point of the estimated interval is thus
6.25 per cent. There are also other estimates of the long-run sustainable unemployment rate. In the latest
issue of its report "Wage Formation in Sweden", the National Institute of Economic Research assesses this
rate to be around 7 per cent at present, but that it will fall to around 6 per cent in the years immediately ahead
(see Wage Formation in Sweden 2012, National Institute of Economic Research). According to a calculation
by Lars Svensson of how the deviation between the actual inflation rate and the inflation target affects
unemployment, the mid-point of the Riksbank's estimated interval is at 5.5 per cent (see "Correction of the
Riksbank's estimate of the long-run sustainable unemployment rate", Appendix 2, minutes of the monetary
policy meeting, July 2012).
have levelled out. This differs from the situation in Norway where prices continue to increase,
and in Denmark, where there has been a significant fall in prices.
Figure 8. Real house prices
Index, 1995=100
300 300
Norway
Finland
270 270
Denmark
Sweden
240 240
210 210
180 180
150 150
120 120
90 90
95 97 99 01 03 05 07 09 11
Sources: Statistics Sweden and national sources.
Figure 9. Household wealth and debt
Per cent of disposable income
350 350
Financial wealth (excluding tenant-owned apartments and
collective insurance schemes)
Real wealth
300 300
Debt
250 250
200 200
150 150
100 100
50 50
70 80 90 00 10
Note. The broken line is the Riksbank's latest forecast (from the Monetary Policy Report,
February 2013).
Sources: Statistics Sweden and the Riksbank.
Developments on the Swedish housing market thus appear to be much calmer now than
before the financial crisis. However, it is of course important to constantly analyse whether
developments can pose risks to financial or macroeconomic stability. The development of
household indebtedness could lead to problems if housing prices began to fall for some
reason or if unemployment began to increase sharply in connection with a downturn. In order
to assess to what extent this constitutes a risk we need to analyse the risk of a fall in housing
prices and the extent to which the level of debt makes the households vulnerable. In the case
of the latter, it is important to determine what assets the households have in addition to their
housing. The relatively high level of private saving in Sweden is an advantage here as it has
led to a situation in which the households have relatively substantial financial assets (see
Figure 9).
Analysing the risk of a fall in housing prices is not easy, but a natural starting point is to try to
find good indicators of such price falls based on the experience gained in other countries.
According to a study by the IMF, the likelihood of a fall in housing prices increases if the
growth of loans as a percentage of GDP is high, the current account is in deficit and housing
investments are high in relation to GDP.12 Put simply, one can say that the risk of a fall in
housing prices is high in economies where there is a loan-financed building boom and where
the loans are largely backed by funding abroad rather than by domestic saving.
Credit growth has indeed been relatively high in Sweden for a number of years, so on the
basis of just this indicator there is some reason to believe that there is an increased risk of a
fall in housing prices. However, the situation with regard to the current account and housing
investment has rather been the opposite of that associated with an increased risk of such
price falls. As I mentioned earlier, Sweden has a substantial surplus on its current account
and this has now been the case for many years. Figure 4 also illustrated developments in a
number of countries where housing prices have fallen, such as Ireland, Spain and the United
States, and we can see that the current account deficits have been relatively substantial in all
of these countries. One explanation of the relatively low level of overall investment in
Sweden, which is one of the factors behind the current account surplus, is in fact the low
level of investment in housing (see Figure 10). There are thus no signs that the credit growth
we have experienced has financed a building boom or that it is associated with a low level of
domestic saving.
In recent years, the number of new-builds in the housing sector in Sweden has been around
20 000 per year, which a low figure in historical terms.13 The low level of new housing
construction is thus an important factor behind rising house prices.14
Figure 10. Housing investment as a proportion of GDP
Per cent
12 12
2001-2007
2008-2010
10 10
8 8
6 6
4 4
2 2
0 0
Note. Average value 2001-2007 and 2008-2010. No figures are available for 2010 in
the case of Ireland and Japan, so the red bar refers only to 2008-2009.
Source: Vredin et al. (2012), Report of the Economic Policy Group 2012. Simple rules,
difficult times - does stabilisation policy need to be changed?
Other indicators of falls in housing prices have also been proposed, for example the positive
deviation of housing prices from a long-term trend, which at present is relatively high in
Sweden.15 However, the point is that the picture provided by the typical indicators of a fall in
housing prices is mixed for Sweden. Some appear to be alarming while others are practically
the opposite of what is typically the case before a fall in housing prices. This does not of
course mean that we can be certain that prices will not fall, but it is still important to have this
background clear in order to be able to assess the risks on the housing market.
If developments in the period ahead are such that it seems justified to take measures to
dampen housing prices and household indebtedness, I am nevertheless doubtful about using
the repo rate to do this. It would be better to reduce the level of the loan-to-value ceiling that
Finansinspektionen recommends the banks to stay below, or to raise the banks' risk weights
for mortgages.16 Another alternative would be to reduce the tax deductions for interest
payments somewhat. Unlike repo-rate increases, these measures are aimed directly at
mortgages. These are of course measures that do not lie within the Riksbank's mandate, but
it is in everyone's interest to ensure that the risks associated with the Swedish housing
market are managed effectively.
So why am I against using the repo rate to influence housing prices and household
indebtedness? The main reason is that the costs - in the form of inflation below the target
and unemployment - appear to be high in relation to rather uncertain gains. Most analyses
indicate that the policy rate has very little impact on housing prices and thus also on
household indebtedness.17 Using the repo rate would be justified if what we were seeing was
a credit boom throughout the Swedish economy. But this is not what we are seeing.
Household indebtedness is increasing at approximately the same rate as disposable
incomes. The rate of growth in bank lending to companies typically varies with the business
cycle, and at present this rate is low (see Figure 11). All in all, credit growth is relatively low
in the Swedish economy.
Figure 11. Lending to households and companies
from monetary financial institutions
Annual percentage change
20 20
15 15
10 10
5 5
0 0
-5 -5
Total lending from monetary financial institutions
Companies
Households
-10 -10
03 04 05 06 07 08 09 10 11 12 13
Source: The Riksbank.
Another problem with using monetary policy to influence household indebtedness is that this
also has an impact on the exchange rate. All else being equal, higher interest rates lead to a
stronger currency and, again all else being equal, a stronger currency leads to lower inflation
and lower resource utilisation.
There are thus clear costs associated with using monetary policy in this way. The alternative
- and a better one - is to separate monetary policy from the policy that aims to promote
financial stability. This could be done by establishing an effective framework for
macroprudential policy that is a policy that aims to counteract risks in the financial system as
a whole.
A separate macroprudential policy
In January 2013, the Financial Crisis Commission presented an interim report that discusses,
among other things, how financial crises can be prevented in Sweden. The Commission
proposes the setting up of a council for macroprudential policy. This would entail the existing
council for cooperation on macroprudential policy between the Riksbank and
Finansinspektionen being established by law and complemented by independent experts and
an observer from the Ministry of Finance. The council should also work to develop
macroprudential policy instruments, analyse risks and discuss appropriate measures. The
intention is that responsibility for deciding whether or not to apply a macroprudential policy
instrument would lie with either Finansinspektionen or the Riksbank.
The Commission's proposal is well-reasoned and wise, but, as I see it, has one flaw: it is
unclear who is ultimately responsible for conducting macroprudential policy. As it will usually
be a question of taking measures that are unpopular - for example limiting the possibilities of
households to borrow money in a way that will restrict their choices about where they can
live, or limiting the possibilities of financial companies to earn money - it is vital that
someone is made responsible for ensuring that the measures are actually taken. This may
well be, as the Commission suggests, the Riksbank or Finansinspektionen. However, I am
sceptical about both authorities being responsible, as it will be all too easy to blame each
other when a crisis actually develops.18
It is of course natural for the Riksbank to play a central role in macroprudential policy, as
financial stability is a precondition for macroeconomic stability and risks to financial stability
are therefore analysed on an ongoing basis.19 However, a responsibility for macroprudential
policy may potentially come into conflict with the independence the Riksbank has in the field
of monetary policy. This is an independence based on the realisation that a
politicallygoverned monetary policy tends to be inflationary, as it may be tempting for political reasons
to renege on a promise of low inflation and to conduct a more inflationary monetary policy
that reduces unemployment in the short-term.20 However, independence goes hand in hand
with a clearly-defined objective for monetary policy that can be constantly evaluated.
Macroprudential policy is different in nature, as the objective is to prevent crises. It is of
course possible to constantly register whether a crisis has occurred or not, but if a crisis has
not occurred it is difficult to determine whether the measures taken have been well-designed
or not. As it is a case of unpopular measures, one might think that it would be an advantage
if the decisions were made by people who in practice cannot be dismissed. But this this may
not be a particularly good solution from a democratic point of view.
At the same time, macroprudential policy may address the issue of macroeconomic stability
in such a way that it comes close to what monetary policy aims to achieve. The
historicallyhigh level of household indebtedness in Sweden does not perhaps in the first instance pose
a risk of financial crisis but to macroeconomic development in the longer term. A fall in
housing prices in connection with an economic slowdown with increased unemployment
could lead to a severe downturn if the households reacted by significantly increasing their
saving to compensate for declining wealth.21 This risk relates to financial and macroeconomic
imbalances rather than to financial stability. They are also imbalances that must be viewed in
a much longer perspective than the perspective we usually adopt when we make decisions
about the repo rate.
Financial and macroeconomic imbalances of this type can of course result in financial crises,
but do not do so automatically. We should therefore distinguish between avoiding such
imbalances and avoiding crises than threaten the financial system. In both cases I believe
that we need an active policy alongside the standard stabilisation policy. I am sure that
everyone agrees that the Riksbank has a central role to play in analysing the emergence of
financial and macroeconomic imbalances. However, what the role of the Riksbank should be
when it comes to deciding on measures to counteract imbalances in the longer term is a
more open question at present. In my view, it is important that macroprudential policy is put
in place as a separate policy area. This would be good for financial stability, but also good for
macroeconomic stabilisation. The proposal of the Financial Crisis Commission has now been
circulated for comment and I and the other members of the Executive Board of the Riksbank
will now formulate our joint response to the proposal during the spring.
Conclusions
I thus believe that there are many indications that demand is too weak in the Swedish
economy and that in principle this has been the case ever since the autumn of 2008. One
should not have exaggerated expectations of what monetary policy can achieve when it
comes to reducing the relatively high level of unemployment in Sweden. However, as long as
inflation is expected to be clearly under the target of 2 per cent I believe there is scope to use
monetary policy to try to alleviate the situation on the labour market.
I have argued that one of the reasons why fiscal policy and monetary policy have not been
used more actively to increase demand in the Swedish economy is the concern about
financial stability. The risk that public finances will be radically weakened if the government is
forced to intervene to support banks in crisis seems to be an argument for being cautious
with public finances at present. The risk that low interest rates will increase household
indebtedness and that this in turn will increase the vulnerability of the households if, for
ex