It requires a belief that we as central bank economists have a solid understanding of all important aspects of the monetary transmission mechanism. In my opinion – which is neither very original nor controversial – we are not quite there yet. One such area in which our understanding can be improved concerns the credit markets. A fundamental problem is that we presently lack the analytical tools that accurately capture the role played by credit and house prices in the economy. The research of Chairman Bernanke and others regarding the importance of collateral constraints and the financial accelerator effects on firms’ investment have paved the way for an increased understanding of these complex issues. Their research has been extended by others to the household sector – the idea being that as house prices increase, credit-constrained households are able to engage in so-called mortgage equity withdrawals and raise their consumption. In time, insights from these models will help us to better analyze house prices and household debt in integrated, general equilibrium setups. In fact, this is an area into which the Riksbank is putting some modelling efforts, trying to understand how credit markets can be integrated with our general equilibrium approach to fluctuations in growth and inflation. 4  BIS Review 96/2007  In the future we will hopefully be better able to analyze how developments in asset prices influence the future course of inflation and output, and how the monetary transmission mechanism is affected by changing asset prices.
Measures of underlying inflation that exclude the effects on CPI of our own interest-rate changes have been closer to the target of 2 per cent, as have inflation expectations (see Figure 1). BIS Review 96/2007  1  Figure 1: Inflation Expectations in Sweden Money market agent expectations, annual percentage change 5  5 Inflation expectations CPI  4  4  3  3  2  2  1  1  0  0  -1  -1  -2 1994  -2 1996  1998  2000  2002  2004  2006  2008  2010  2012  Sources: Prospera Research AB and Statistics Sweden  Figure 2: Real estate prices Index 1996 4th quarter = 100 350  350  Australia UK United States Sweden  300  300  250  250  200  200  150  150  100  100  50  50  0  0 97  98  99  00  01  02  03  04  05  06  07  Sources: Australian Bureau of Statistics, Nationwide, OFHEO and Statistics S eden  Since my remarks are to be on the role that house prices have played in Swedish monetary policy in recent years the following should be noted too. Since 1996 nominal house prices in Sweden have more than doubled (the increase is around 140 per cent, see Figure 2) and the average price for a coop condominium has risen even more.