I am thinking instead of, for example, Mexico, Indonesia, Thailand, South Korea, Malaysia and Brazil. In these cases, inflated asset prices and both domestic and external debt had an important bearing on the subsequent course of events. One important lesson is that a floating exchange rate with an explicit inflation target makes it easier to avoid a situation with rapidly rising asset prices, an unduly strong expansion of credit and high short-term borrowing abroad. That does not mean that a fixed, but adjustable, exchange rate is bound to result in problems of this type. Experience from Denmark is a good example. A clear problem in Sweden’s case, however, was that in the 1980s monetary policy could not be used to counter the tendencies to strong credit growth and rapid asset price increases. Another problem, as I just mentioned, was that the fixed exchange rate policy lulled people into a false sense of security and provided an incentive for short-run borrowing in foreign currency. With a floating exchange rate, the krona’s fluctuations make the exchange risk more evident (Diagram 2). Such a regime may have other drawbacks but it does show potential borrowers that foreign-currency loans involve a risk. The stock of foreign-currency loans to households and firms is in fact smaller today than it was a decade ago. A point to bear in mind is that the problem in the late-1980s was not the strong asset price rise as such but the combination of this and heavy borrowing in Sweden and abroad.
The wealth effect tends to be symmetric, in the sense that economic activity is stimulated by rising asset prices to much the same extent as it is checked when asset prices fall. Neither are wealth effects usually all that great. Problems arise when they coincide with an expansion of credit. The effects may then be asymmetric in that they are more extensive when asset prices fall. The balance-sheet effects lead to loan losses and, in more serious cases, to the suspension of payments. In the worst case there will be a financial crisis. The situation today does not resemble what happened in the second half of the 1980s, as can be seen from Diagram 1. Asset prices have indeed risen strongly in recent years but credit has not grown to the same extent. It seems that at least to date in the present upswing, Swedish banks and their customers have had another approach to the provision of credit and to borrowing. A pause may be called for here to take a look at monetary policy’s attitude in principle to asset markets compared with markets for goods and services. The inflation targeting policy that has been introduced in Sweden and other countries in the past decade has in many cases had the purpose of mastering recurrent overheating in product and labour markets. It might be said, somewhat improperly, that the policy aims to avoid the “bubbles” that have tended to arise in these markets from time to time.