Nyberg: Monetary policy and house prices
“In connection with such dramatic events as the recent financial crisis, proposals for radical changes tend to crop up in the general debate. But I do not see a radically different monetary policy ahead of me. I am still convinced that flexible inflation targeting is the best monetary policy solution for Sweden. One of the areas where the crisis seems to have put new life into the discussion, is what stance central banks' monetary policy should take when developments in house prices and lending appear untenable. The repo rate is not the most effective weapon for trying to prevent or alleviate an imbalance in, for instance, the property market, but this does not mean it is completely ineffective.
We must become better at analysing financial conditions and not least at capturing variables such as house prices and credit growth in our forecasts. And this is something we are working hard to achieve – both at the Riksbank and in many other parts of the world. We must become better at clearly explaining how we assess the risks of a bubble given a particular repo rate policy, and what consequences a bubble may have if it bursts. And we need, and will most probably also obtain, better support from the framework for financial stability that we and others are now working to develop both in Sweden and abroad. When this project is complete, it will contribute to monetary policy more rarely needing to take into account untenable developments in the housing and credit markets. But I do not think we can achieve an entirely “bubble-free” world.”
Read the whole speech in the PDF file below.
