Wolfgang Munchau


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Unfortunately the two goals are inconsistent.

Riksbanken får beröm för att dom ljög
The International Monetary Fund last week gave central banks some wicked advice.
They should no longer ignore residential property prices when setting interest rates.
At the same time, the IMF recommends central banks should retain their inflation-targeting frameworks.
It all sounds very plausible. Unfortunately the two goals are inconsistent.
Wolfgang Münchau Financial Times April 6 2008

The Changing Housing Cycle and the Implications for Monetary Policy,
chapter 3, IMF World Economic Outlook, April 2008;

The New Keynesian forecasting models, with which central banks predict future output and inflation, have no explicit role for money, financial markets and asset prices. The way modern central banks deal with asset price bubbles is to do nothing until they burst and then clean up the mess.

The problem is that you cannot just shove an asset price formula into the model. Of course, central banks can always try “interpreting existing mandates more flexibly”, as the IMF put it – or lie about your policy.

The IMF approvingly cites the case of the Swedish Riksbank, which had persistently undershot its inflation target from 2004 until 2006, yet refused to cut interest rates. The Riksbank was concerned about the country’s property bubble at the time. I think the Riksbank had a point. But it was dishonest to pretend that it was an inflation targeter at a time when it clearly was not. It was happy to let inflation fall outside the target rate for a prolonged period.

The residential property market drives the business cycle. The more liberal a country’s mortgage market, the greater the influence of housing on the economic cycle and the greater the influence of monetary policy on house prices.

The IMF ranks various countries according to a metric of mortgage market liberalism, with the US on top and Germany, France and Italy near the bottom, as one would expect. The metric is made up of several factors, including typical loan-to-value ratios.

The UK and especially Spain are ranked surprisingly low, which I find implausible. I would rate the UK property market as among the most susceptible to a downturn in the credit cycle.

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Årtionden med höga skatter har proletariserat den svenska medelklassen
Medelsvensson i ett av världens rikaste länder är fattig - bara var femte svensk har en förmögenhet över huvud taget om vi bortser från våra tillgångar i fastigheter.
Sofia Nerbrand, chefredaktör på samhällsmagasinet Neo, på SvD ledarsida 25/9 2006