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Financial stability, asset prices and
monetary policy
Svein Gjedrem
Central Bank Governor
Centre for Monetary Economics 3 June 2003
Objectives
• Price stability
- Clear definition
• The interest rate as an instrument
• Financial stability
- More difficult to define
• Financial instability
– Volatile asset prices
– Failure in the functioning of financial institutions/markets
1
180
Debt in municipalities, non-financial institutions and
households as a percentage of nominal GDP. 1890-2002
180
150
150
120
3)
1)
90
2)
3)
90
2)
60
60
30
30
0
1890
1)
120
0
1910
1930
1950
1970
1990
The increase in 1960 is partly due to a downward revision of GDP in connection with the transition to a new national accounting
standard
The marked fall in 1970 is due to an upward revision of GDP in connection with the transition to a new national accounting
standard.
C3 mainland Norway as a percentage of mainland GDP is used as from 1995.
Sources: Norges Bank and Gerdrup (2003)
Twelve-month rise in bank lending at year-end deflated
by the rise in the consumer price index
Per cent. 1890-2002
60
60
Commercial banks
45
45
Savings
banks
30
30
15
15
0
0
-15
-30
1890
-15
-30
1910
1930
1950
1970
1990
Sources: Statistics Norway, Gerdrup (2003) and Norges Bank
2
Growth in real GDP 1)
Percentage change on previous year. 1865-2001
20
20
15
15
10
10
5
5
0
0
-5
-5
-10
1865
1)
-10
1885
1905
1925
1945
1965
1985
Private sector, mainland Norway, from 1970
Sources: Statistics Norway and Norges Bank
Fixed investment1)
Annual percentage change. 3-year moving average 1865-2000
20
20
15
15
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
-20
1865
-20
1)
1885
1905
1925
1945
1965
1985
Private sector, mainland Norway, from 1970
Sources: Statistics Norway and Norges Bank
3
Relationship between asset prices, debt and the real
economy
Consumer
price
inflation
Investment
Asset prices
Credit
Employment
Output
Wages and
margins
Consumption
Household gross financial assets, housing wealth and
debt. Percentage of disposable income
Housing wealth
250
200
250
200
Gross fin. assets
150
Debt
150
100
Gross fin. assets
excl. insurance claims
100
50
1984
50
1987
1990
1993
1996
1999
2002
Source: Norges Bank
4
The traditional view
• No emphasis on asset prices and debt accumulation beyond the
effect they have on price inflation
• Uncertain when financial imbalances will be triggered
• Identification is difficult
• Can monetary policy reduce the build-up of imbalances?
Low inflation not sufficient
• Bubbles develop without a rise in inflation:
- Credible monetary policy
- Increased competition
- Supply-side factors (productivity)
• Financial imbalances may influence inflation in the medium
term
• A monetary policy that at times leans against the wind with
regard to developments in credit growth and asset prices
5
Norges Bank Watch 2001
• “The first and main stage is flexible inflation targeting…..”
• “The additional stage consists of monitoring credit aggregates. It
requires the central bank to monitor a number of credit
aggregates, and to intervene and possibly to overrule the signals
given by the first stage. One would expect that this would not
happen frequently. In normal times it will remain unused.”
Source: Norges Bank Watch 2001
Bank of England
• “An interest rate reduction seemed likely at present
predominantly to affect house prices, household borrowing and
consumption, which were already increasing strongly. A further
reduction in the repo rate risked creating an unsustainable
increase in debt which might subsequently unwind sharply. This
would increase the risk of undershooting the inflation target in
the medium term.”
Source: Minutes of the Monetary Policy Committee Meeting, 9 and 10 October
2002, Bank of England
6
Household debt burden
Loan debt as a percentage of disposable income
180
180
160
160
140
140
120
120
100
1987
100
1989
1991
1993
1995
1997
1999
2001
Source: Norges Bank
Household debt as a percentage of disposable income
180
180
Denmark
160
Norway
140
120
160
140
120
UK
100
US
Sweden
80
1990
1992
1994
1996
1998
2000
100
80
2002
Sources: Sweden’s Riksbank, Danmarks Nationalbank, OECD and Norges Bank
7
Household debt as a percentage of gross financial assets
and housing wealth
60
60
50
50
40
Norway
Sweden
30
40
30
Denmark
20
UK
20
10
US1)
10
0
1990
0
1992
1994
1996
1998
2000
2002
1) Non-financial assets are used instead of housing wealth for US
Sources: Sweden’s Riksbank, Danmarks Nationalbank, Bank of England, OECD and Norges Bank
House prices deflated by the building cost index and
annual wage index. Index, 1987=100.
150
150
Deflated by the building
cost index
125
100
125
100
Deflated by the
annual wage index
75
75
50
50
25
25
0
0
1987
1989
1991
1993
1995
1997
1999
2001
Source: Norges Bank
8
Debt burden in non-financial enterprises
excl. petroleum and shipping
800
As a percentage of cash surplus1) excl. interest expenses
800
700
700
600
600
500
500
400
400
300
300
200
200
1987
1)
1989
1991
1993
1995
1997
1999
2001
Cash surplus = Value added - labour costs + net capital income
Sources: Statistics Norway and Norges Bank
Credit gap: Debt in municipalities, non-financial institutions and
households as a percentage of GDP –
difference between actual observations and trend 1). Percentage points
24
24
16
16
8
8
0
0
-8
-8
-16
-16
-24
-24
-32
-32
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
1)
Trend is calculated using a rolling HP filter (λ=1600), according to the method of Borio and Lowe (2002).
Calculated using annual data from 1899. Mainland C3 as a percentage of mainland GDP is used as of 1995
Sources: Gerdrup (2003) and Norges Bank
9
Developments in number of bankruptcies, employment
and sales value of bankrupt companies. Index
350
350
Sales
300
value1)
300
Number of
bankruptcies
250
250
200
200
150
150
100
Number employed1)
50
50
1) Turnover
2)
0
1995
1996
and employment in last normal operating year
Annualised figures based on Q1 2003
1997
1998
1999
2000
2001
100
0
2002 2003 2)
Source: Statistics Norway
Gross non-performing loans, by sector.
All banks. In billions of NOK
3.5
3.5
3
3
2.5
2.5
2
2
Other sectors
1.5
1.5
1
0.5
0
1997
1
Corporate sector
0.5
Household sector
1998
1999
2000
2001
2002
0
2003
Source: Norges Bank
10
Trade-weighted exchange rate index (TWI) and
three-month interest rate differential
July 1999 – May 2003
5
4
90
95
Interest rate differential,
(left-hand scale)
3
100
TWI,
(right-hand scale1) )
2
1
0
1999
Source: Norges Bank
105
110
115
2000
2001
2002
1)
2003
A rising curve denotes an appreciation of the krone
11