A high level of indebtedness can cause what one might call debt dominance in the economy, which put constraints on economic policy and leads to general unease over how debt will be reduced – whether this can be achieved in an orderly manner or whether it will be a rapid, abrupt process with substantial negative effects on the economy. Riksbank quick to point out the risks with a credit boom I mentioned earlier that prior to the crisis there was a discussion on whether central banks should try “leaning against the wind” to dampen the credit boom and the upturn in housing prices that could be observed in a number of countries. One could actually claim that the Riksbank was one of the first central banks to clearly highlight the risks linked to household indebtedness and housing prices in its monetary policy agenda, and it was also one of the few central banks that in practice conducted a policy prior to the crisis that to some extent entailed “leaning against the wind”. 6 I myself discussed the Riksbank’s policy at the annual conference in Jackson Hole in 2007. 7 This was before the crisis had really made itself felt and there was considerable scepticism of a “leaning against the wind” policy. When the crisis came, opinion changed and as I see it, there is today considerably more understanding and acceptance for the policy we conducted.
Something one should always bear in mind, but which I do not intend to discuss further here, is that decisions we make regarding conditions in Sweden must also be incorporated into a broader, European context. There are also a number of questions, particularly with regard to the interplay between macroprudential policy and monetary policy, that sooner or later may need to be dealt with in practice and it would be wise to have thought them through. Coordination... Some of the research into macroprudential policy – which is in general still in its infancy – tries to analyse the importance of coordinating macroprudential policy and monetary policy. The idea is roughly as follows: Monetary policy and macroprudential policy act through largely the same channels. Both the policy rate and most macroprudential tools affect, for instance, credit growth in the economy and developments in various asset prices. This also means that the two policy areas affect one another’s objectives. Monetary policy affects the credit cycle – which was the whole point of “leaning against the wind”, and macroprudential policy has effects on the business cycle. It is therefore desirable to find the right policy mix – the combination of policy rate and macroprudential tools that give the best overall outcome for the economy. The conditions for finding the right mix are normally improved if the two types of policy are coordinated, rather than determined separately. 14 The importance of coordination is also pointed out in more practical economic policy contexts.