As Englund (2011) shows in the Riksbank’s inquiry into the risks in the Swedish housing market, the fundamental value of housing is largely determined by the long real mortgage rate after tax and the value of the housing services provided by the housing. The value of the housing services in turn has a stable relationship to disposable income (housing costs comprise 25–30 per cent of disposable income).7 Put simply, the after-tax mortgage rate determines how much a homeowner is prepared to pay for his or her home for the housing costs to be 25 to 30 per cent of the homeowner’s disposable income. This means that the relationship between housing prices and disposable income is largely determined by the long real mortgage rate after tax, including the effects of wealth and property taxes. As Englund  goals of maximum employment and stable prices”. In this case too, maximum employment means maximum sustainable employment. The Federal Reserve Board (2012) also emphasises the longer-run normal rate of unemployment. 7  Statistics Sweden (2012, table 9.1.8). BIS central bankers’ speeches  3  demonstrates, developments in Swedish housing prices in relation to disposable income are largely explained by a strongly negative trend in long real mortgage rates after tax since the mid-1990s. The established view of monetary policy is that it is not able to affect short and long real interest rates in the long run.
In practice, monetary policy has to some extent neglected the price stability objective and led to unnecessarily high unemployment. Against this background, it is remarkable that monetary policy in Sweden nevertheless seems to have been aimed at influencing household indebtedness. Any problems arising from household indebtedness could be better managed by other means than the policy rate, such as mortgage caps and tax regulations, which, unlike monetary policy, are effective in both the short run and long run (Svensson 2012c). The Riksbank’s mandate – price stability and the highest sustainable employment – demands a lower policy rate and policy-rate path I thus believe that monetary policy should be more expansionary than it is at present, that is, the policy rate and the policy-rate path should be lower. The Riksbank’s mandate should, in line with the Sveriges Riksbank Act and its preliminary works, be interpreted as price stability and the highest sustainable employment (Svensson 2012b).5 The highest sustainable employment is in practice the same as the lowest sustainable rate of unemployment. Every monetary-policy decision thus entails setting the repo rate and selecting the repo-rate path that best stabilises inflation around the inflation target and unemployment around a long-run sustainable rate.6  3  Andersson, Palmqvist and Österholm (2012) discuss the Riksbank’s target attainment during a different period, that is a period beginning in 1995 instead of in 1997, which gives an average of 1,5 per cent for CPIinflation in 1995–2011 instead of 1.4 per cent. During 1995–1996, CPI inflation was 1.8 per cent, which increases the average.