The Usefulness of the Debt Ratio - The Role for Measures of Financial Imbalances within the Monetary Debate and the Division within the Swedish Riksbank

Sammanfattning: The aftermath of the 2008 global financial crisis has seen more and more attention within the monetary debate shifted toward the buildup of financial imbalances within the economy and the increasing levels of household debt. For years, this issue has divided the Executive Board of Governors at the Swedish Riksbank into a hawkish Majority faction and a dovish Minority faction. The measure of financial imbalances that currently dominates the monetary debate is the debt ratio-household debt as a share of total disposable income-and this thesis aspires to scrutinize this elevated position. By employing both a macro- and a micro-oriented approach, we conclude that the debt ratio has a limited value both as a descriptive measure of historic events, and as a prescriptive indicator of future development. We believe that in order to justify an approach to monetary policy that weighs financial imbalances equally against the traditional target variables of inflation and resource utilization, practically useful predictors are a necessity. Unless the debt ratio can offer tangible input into the monetary decision-making process-and we believe that it cannot-the Riksbank would be better suited to focus on achieving its traditional goals. There are more effective alternatives to tackle increasing household debt levels, than a policy rate which affects all aspects of the economy. As such, the main tool available to a central bank is a broadsword. What is needed is a scalpel.