In Danmarks Nationalbank’s assessment, prices of flats in Copenhagen are not far from their equilibrium – although the equilibrium level is difficult to identify precisely. The equilibrium price can be expected to increase by 2–3 per cent annually, but experience shows that there may be large deviations from this trend.
What should be done when such uncertainties seem particularly acute? When we suspect that our understanding of the macroeconomic environment has deteriorated, as evidenced by strings of surprises difficult to reconcile with our earlier beliefs, I think that the appropriate response is to rely less upon the future predicted by the increasingly unreliable old models and more upon inferences from the more recent past.