During the period 2008–2012, the rate of inflation has exceeded the inflation target in the United Kingdom. However, this is compatible with an optimal monetary policy when unemployment, as in the case of the United Kingdom, exceeds a long-run sustainable rate. BIS central bankers’ speeches  1  average inflation has thus been significantly lower than these expectations. According to established theoretical and empirical research concerning the link between inflation and unemployment – the so-called expectations-augmented Phillips curve – this means that the average rate of unemployment since 1997 has been higher than necessary, according to my calculations approximately 0.8 percentage points too high, which is equivalent to about 38,000 unemployed people in Sweden (Svensson 2012b, d).3 Monetary policy is an inappropriate instrument for limiting household indebtedness Monetary policy is thus tight at the moment, with a higher real short rate than abroad, an inflation rate significantly below the target, and unemployment well above a reasonable longrun sustainable rate. A possible explanation for this tight monetary policy is that it has aimed to limit household indebtedness, measured as the ratio between debt and disposable income.4 However, as I will soon explain in more detail, according to established theoretical and empirical research, monetary policy has only a very limited short-run impact on the household debt ratio and – when inflation is low and stable – no long-run impact. A tight monetary policy thus instead leads to inflation being too low and unemployment being too high, without having a tangible effect on potential risks arising from household indebtedness.

Monetary policy has limited short-run effects on household indebtedness and – with low and stable inflation – no long-run effects As I said earlier, a possible explanation for the tight monetary policy is that in practice the aim has been to limit household indebtedness, that is, the household debt ratio. As far as I can see, there is a misunderstanding here about what monetary policy can achieve with regard to household indebtedness. As I pointed out in a speech in November last year (Svensson 2012c) and at the monetary policy meeting in December (Sveriges Riksbank 2012d), according to established theoretical and empirical research, including the Riksbank’s own studies and calculations, for example Riksbank (2011), monetary policy has very little short-run impact on household indebtedness and, with low and stable inflation, no long-run impact. Household debt has risen to approximately 170 per cent of disposable income. The debt is mainly mortgages, so in order to understand the development of debt and whether it is a problem, we must understand developments in housing prices and the value of housing. Households’ real assets (owner-occupied homes, second homes and condominiums), have grown in pace with their debt and there is a stable relationship between them. The loan-tovalue ratio, the ratio of debt to real assets, has been relatively stable and has remained in the interval of 50–60 per cent since the mid-1990s (Figure 4). There has been considerable research into how housing prices are determined.