THE REAL ECONOMIC EFFECTS OF MONETARY POLICY: CONSIDERING ASSET PRICES AND HOUSEHOLD DEBT

Abstract

Cycles in economic activity and assets pricing are a recurrent theme in economics. Throughout the twentieth century there has been a debate regarding the role of monetary policy in the creation and prevention of real economic shocks. The purpose of this thesis is to model the response in Swedish real economic activity to changes in monetary policy, accounting for asset pricing and debt growth. Such a model is useful for policymakers to assess the impact of policy changes on real economic stability. To answer this question both a traditional structural vector autoregressive, SVAR, and the more recent local projection, LP, estimation technique is used. The results indicate that when using LP, repo rate increases tend to yield negative real economic growth approximately two years after a policy shock when taking asset prices and debt into account The estimates from SVAR corroborate the results of the LP technique, but yield overall statistically insignificant results.