Working Paper: CEPR ID: DP14585
Authors: Lars E.O. Svensson
Abstract: Much is right with Swedish macroprudential policy. But regarding risks associated with household debt, the policy does not pass a cost-benefit test. The substantial credit tightening that Finansinspektionen (the FI, the Swedish Financial Supervisory Authority) has achieved – through amortization requirements and more indirect ways – has no demonstrable benefits but substantial costs. The FI - and the international organizations that have commented on risks associated with Swedish household debt - use a flawed theoretical framework for assessing macroeconomic risks from household debt. The tightening was undertaken for mistaken reasons. Several reforms are required for a better-functioning mortgage market. A reform of the governance of macroprudential policy – including a decision-making committee and improved accountability – may reduce risks of policy mistakes.
Keywords: macroprudential policy; housing; mortgages; household debt; macroeconomic risk
JEL Codes: E21; G01; G21; G23; G28; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased household debt (G51) | heightened sensitivity of consumption to economic shocks (D12) |
| credit tightening measures (E51) | substantial costs on households (D10) |
| tightening of mortgage lending standards (G21) | no enhancement of financial stability (F65) |
| tightening of mortgage lending standards (G21) | increased vulnerability to income shocks (G59) |
| increased debt service obligations (F34) | reduced resilience in households (R20) |
| absence of mortgage-financed overconsumption (G51) | undermines justification for stringent mortgage regulations (G21) |