Our research suggests that the sharp buildup of student debt has contributed to large behavioral  BIS central bankers’ speeches  5  changes among the Millennial generation. First, among those with student debt, a growing share continues to live with their parents. For example, we see that states that have experienced sharper climbs in average student debt per graduate since the recession have also shown steeper growth in the rate at which 25 year olds live with their parents. Similarly, our research suggests that student debt has contributed to a decline in home and car purchasing. As shown in the next chart [Chart 7], the proportion of 30 year olds with a home mortgage and the share of 25 year olds with a car loan have dropped much faster among those with SL debt. More serious econometric research indicates that the relationships between increased student debt and both higher coresidence with parents and lower home buying at age 30 are in fact causal and exist whether or not one controls for educational attainment. Holding other factors constant we find that in states with larger increases in student debt per graduate there was a greater decline in home buying by young individuals. Overall, the high level of existing debt and the apparent new norm for college financing, have important long-term implications for the housing market.
Perhaps the most pertinent question, however, is whether these historical “forecasting errors” would have had any decisive consequences for monetary policy if they had been anticipated well in advance. The answer in my opinion is: probably not. Even if we had allowed for the interest expenditure item’s downward effect on CPI inflation in 1996–97, we would still have lowered the repo rate. Neither would it be realistic to suppose that the Riksbank would have, as it were, chased its own tail and lowered the interest rate appreciably more on the grounds that CPI inflation was below the target. In the period in the late 1990s, resource utilisation was already rising rapidly and an even more expansionary monetary policy would hardly have been justified. The instrumental rate in Sweden was a good bit lower than in the United States in these years and also lower at times than in the euro area, at the same time as the Swedish krona was comparatively weak. Concerning the past year’s increase in inflation, it was not the supply shocks that prompted the decision in March to raise the repo rate but the picture that was beginning to emerge of the Swedish economy being rather close to or even somewhat above full resource utilisation. This may be a major problem, not for current inflation but rather for future inflation as activity continues to strengthen.