Economic Commentary: How is the economy affected by macroprudential policy measures?

Date 03/06/2015

In this Economic Commentary, the authors present a general description of the socio-economic effects of a selection of possible measures aimed at limiting households' demand for loans. The gains of using macroprudential policy measures and limiting continued build-up of debt are that the risk and potential costs of future crises decline. But the measures may also have short-term macroeconomic costs in the form of lower consumption and growth. When introducing a measure, the long-term gains must thus be weighed against the short-term costs.

Debt-to-income limits, mortgage caps, limits in the discretionary income calculations and amortisation requirements are examples of measures that can contribute to dampening the development of household indebtedness. They only affect new borrowers. There are many indications that the macroeconomic costs, in the form of lower consumption and growth, are therefore limited. An adjustment of the tax deduction is a potentially more powerful tool for dealing with household indebtedness, as it can affect all borrowers, depending on how it is formulated. The macroeconomic costs can thus also become greater. However, the size of the effects of a measure do not solely depend on how many borrowers are affected, but also on the size of the actual measure.

Prior to the publication of the Financial Stability Report on 3 June, the analyses used as a basis for the report will be published as Economic Commentaries. In line with the main theme of the report, the commentaries contain an analysis of the financial risks in the household sector, possible measures to manage these risks and the macroeconomic effects of these possible measures. This is the fourth and final one of these Economic Commentaries.

Read the entire commentary here: "How is the economy affected by macroprudential policy measures?"

Read the earlier commentaries here: "Financial risks in the household sector", "An analysis of the fixation period for Swedish mortgages", "An analysis of the debt-to-income limit as a policy measure"

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By Gabriela Guibourg and Björn Lagerwall. The authors work at the Monetary Policy Department.

 

The opinions expressed in the economic commentaries represent the authors' personal opinions and cannot be regarded as an expression of the Riksbank's view on the questions concerned.