finansinspektionen ( 2013 ). see laseen and strid ( 2013 ) and sveriges riksbank ( 2014b ). bis central bankers ’ speeches figure 4. household debts percentage of disposable income lower repo rate 2013 main scenario note. the experiment with a lower repo rate in 2013 assumes a repo rate cut from 1 per cent to 0. 75 per cent at the monetary policy meeting in february 2013 and a repo - rate path that from december 2013 follows the path published in december 2013 and again in february 2014. sources : statistics sweden and the riksbank one would need to raise the repo rate substantially, perhaps by several percentage points, to have a tangible effect on the risks linked to indebtedness. but the effect would then also be much higher unemployment and a much lower inflation. such a monetary policy stance does not appear appropriate, and would in any circumstance not be compatible with an inflation target. the estimated effect of the repo rate on the debt ratio is very uncertain, so it is not impossible that the actual effect is much greater. at the same time, it is also possible that the actual effect is zero, or even that it would go in the opposite direction so that the debt ratio rises when the interest rate is raised. 13 this could be possible, as the interest rate not only affects indebtedness, it also affects disposable incomes through its impact on economic activity and inflation. a higher interest rate is expected to have a negative effect on both indebtedness and disposable incomes. the ratio between them can therefore in principle rise or fall, even if it appears to be the latter in practice. although i consider that indebtedness in the swedish household sector comprises a risk to macroeconomic developments in sweden, i am extremely doubtful about managing this risk by means of a monetary policy that leans against the wind. the cost appears to be high : inflation is pushed down in a situation where it is already low and unemployment becomes unnecessarily high. on the other hand, the benefit appears small, quite simply because the effect on indebtedness appears small. see svensson ( 2013a ). bis central bankers ’ speeches risks linked to household indebtedness should instead be managed by means of measures taken in other areas. the mortgage cap probably already has some impact. finansinspektionen has also introduced a risk weight floor for mortgage

even if we had had perfect foresight at the time, the mpc would have still been faced with the same choice – the adjustment in real wages was unavoidable. of course if nominal wages start to rise in an attempt to offset that inevitable fall in standards of living, risking a wage - price spiral as the uk had in the seventies, then the mpc would be duty - bound to raise bank rate sooner to bring inflation back to target, regardless of any short - run pressures on output. given the nature and timing of the shocks, i would argue that the best we can do with monetary policy is accept the initial impact and then to gently steer inflation back to target in the medium term. in the remainder of this speech, i want to consider how we come to make our judgments about that, month - by - month, and in particular, discuss the relative role of economic forecasts and human judgment. monetary policy in practice the bank has come in for a lot of criticism recently about its forecasting record. for a period now, cpi inflation has been significantly higher than the bank had been previously expecting. and in 2010 q4 and 2011 q1, output growth disappointed relative to our central expectations. in this section, i want to dig a little deeper into the issues around models and forecasts. step back for a second and consider what an economic model actually is and why it might be useful. at its heart, a model – any model – is just a framework for thinking about an issue, be it how the economy reacts to different shocks, how the setup of a car might affect the way it handles a corner, or how a disease might spread through a population. as all modellers would concede, they can only provide an approximation of reality, which is always far more complex. that isn ’ t to say that models aren ’ t useful – far from it. economic models, like any other, are essential. but they are not a panacea. for example, it would be a mistake to think one can just keep learning and adding to a single economic model until it gets ever more complete. what tends to happen is that one just ends up with a very large model which nobody can understand or use for any practical purpose. instead, the best way forward in understanding the economy seems to be to use a variety of different models, remembering the relative strengths and weaknesses of each, and applying judgment accordingly. that is exactly what the mpc does when it considers