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.
Bank of France reports industrial output continued to make progress in June 1997 BANK OF FRANCE, MONTHLY BUSINESS REVIEW, June 1997. According to the business leaders surveyed by the Banque de France, industrial output continued to make progress in June. Output of consumer and intermediate goods advanced significantly, with a more moderate increase for capital goods, whereas it levelled out in the food-processing industry and slightly dipped in the automobile industry. Capacity utilization rates recovered. Overall demand strengthened both in France and abroad. Export sales grew considerably, in particular to Great Britain, Italy and the United States. Domestic demand rose, stimulated to some extent by inventory replenishment. Order books seem generally satisfactory. While they have emptied out somewhat in the food processing industry, they remain on the full side in the capital goods sector. Inventories are only just above desired levels, despite an increase in the consumer goods sector, and above all in the automobile and food processing industries. In the coming months, activity is likely to intensify across the board, except for the automobile sector which is expected to stabilize. Overall, raw material and finished goods prices changed little. The cost of supplies climbed in certain branches of the intermediate goods sector, mainly due to the rise in the dollar, although these increases were not passed on to sales prices. Business managers continued to take a cautious stance on investment. The little capital expenditure there was primarily concerned the modernisation of equipment and bringing it into line with standards.