urban backstrom : households, stock markets and the financial system speech by mr urban backstrom, governor of the sveriges riksbank and chairman of the board of directors and president of the bank for international settlements, to the share promotion association, stockholm, 21 january 2002. * * * thank you for inviting me to the share promotion association to talk about households, stock markets and the financial system. this means that today i shall not be talking about current monetary policy. first let me note that since the deregulation of financial markets in the 1970s and ’ 80s, central banks around the world have become increasingly interested in the financial system ’ s various functions and institutions. one reason for this lies in the system ’ s central place in society ’ s infrastructure. just as it is important that networks for transport, electricity and telecommunications function properly, so is it essential that, for example, payments can be transacted, capital can be saved and channelled to the most profitable investment projects and that both households and firms get help in handling financial uncertainty and risk as well as possibilities of spreading consumption over time. production and employment are liable to be hit to varying degrees if, for some reason, parts of the financial system do not work as they should or even break down completely. moreover, experience has taught us that the price of shares and other assets plays a major part in the dynamics of economic growth. rising share prices, for instance, tend to stimulate private consumption and business investment and vice versa. it follows that stock market trends are also relevant for monetary policy. so there are a number of good reasons for a central bank to take a closer look at and reflect on how the financial system functions. in recent decades the financial system in most western countries has undergone a notable transformation. one feature of this development is disintermediation, a process whereby a larger proportion of the funds involved in saving and financing flow directly to the financial markets instead of being routed via the banks ’ traditional lending and deposit operations. the general public ’ s heightened interest in share investment, either directly or through mutual funds, has been an important component of this process. statistics show that in recent decades shares have made up an increasingly large proportion of households ’ financial assets. in the same period, moreover, and not least in recent years, it is evident from your association ’ s regular surveys that share ownership in sweden has spread very rapidly. the stock market displays a number of interesting phenomena. in recent decades the real return on

a bayesian vector autoregression ( var ) which includes variables that affect wealth – house and stock prices – and variables that affect income – the unemployment rate and wages. 13 the app shock is identified by assuming ( i ) that it affects the term - spread on impact, without leading to a change in standard monetary policy over the full sample14under analysis ( which spans three years ) and ( ii ) that it has a positive effect on the real economy, on impact. 15 the shock is scaled to a term - spread reduction by 34 basis points, which is the estimated level of the impact of the announcement of the december 2016 app package on the euro area 10 - year bond rates. this implies that the size of the impact considered in the estimates presented in the charts below is smaller than the total effect of our unconventional policies from 2014 to 2016. the analysis is nevertheless representative and conclusive regarding the distributional impact of our monetary policy. the var estimated for the four largest euro area countries shows a degree of heterogeneity across the countries that can be taken as representative of the dispersion that would be found in all other euro area countries ( see chart 4 ). 5 / 14 bis central bankers'speeches chart 5 below shows the four countries ’ average reaction to the relevant variables ( house and stock prices, unemployment and wages ), four quarters after the impact of the app shock. 16 6 / 14 bis central bankers'speeches the app purchases are estimated to increase house prices by more than 1 % and stock prices by 0. 8 %. as for the variables, which affect household income ( in the bottom two panels ) : the unemployment rate declines by roughly 0. 7 percentage points, while wages rise somewhat. 17 in the second step, these aggregate results are combined with household - level data to estimate the effects of monetary policy on individual households. the hfcs provides detailed householdlevel data on income and wealth, but so far only for two waves. however, since the bulk of the effect on wealth occurs via asset prices, we can assume that the response of individual wealth components to the app after four quarters mirrors the response of asset prices at that horizon. 18 the assumption seems acceptable given the short horizon we are considering and 7 / 14 bis central bankers'speeches given the empirical evidence on the sluggishness of adjustment of holdings of real and also financial assets in household portfolios. 19 as for net wealth, chart 6 shows that the effects of the app on