What are the macroeconomic effects of reducing household debt?


Daria Finocchiaro, Magnus Jonsson, Christian Nilsson and Ingvar Strid study, using a macroeconomic model, how different households would be affected by more stringent macroprudential policy measures or tighter mortgage interest deduction.

They show that stricter requirements for loan-to-value limits, debt-to-income limits and amortisations will lead, in the longer term, to a reallocation of resources from lenders to borrowers.


They also show that tighter mortgage interest deduction affects households differently depending on how the government spends the budget funds made available. If the borrowers are compensated for the reduced tax relief on mortgages, such a measure can be positive for their consumption other than housing.


How monetary policy is affected depends on the type of measure implemented; in some cases monetary policy may need to become more expansionary, and in others tighter.


The article concludes with an analysis of how household indebtedness affects the impact of monetary policy on demand and inflation. The higher indebtedness is, the greater effect an interest rate rise will have on borrowers' interest expenditures and disposable incomes, which, in turn, will give households less scope for other consumption. The effects of an interest rate rise on demand – and thus on inflation – is therefore greater today than when inflation targeting was introduced in the mid-1990s.


The article is included in this year's second issue of the Sveriges Riksbank Economic Review, which was published 22 September 2016.


Daria Finocchiaro, Magnus Jonsson, Christian Nilsson and Ingvar Strid

The authors work in the Monetary Policy Department of the Riksbank.

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