The Response of the Riksbankto House Prices in Sweden

Abstract: In the aftermath of the recent financial crisis, an environment of historically low interest rates and extensive household indebtedness in the OECD countries have triggered a vivid debate on whether central banks should react to house price fluctuations in their pursuit of monetary policy. In Sweden, a period of low policy rates and house price inflation was halted when the central bank increased the interest rates in 2010. This paper studies whether the Riksbank reacted to house prices in 1993-2013. Using Bayesian methods and quarterly data, I estimate a DSGE model with patient and impatient households, where the central bank reacts to house price inflation. The results suggest that the Riksbank did respond to house prices during the sample period. The findings are robust and plausible from an economic point of view.