Monetary Policy Implications Through a VEC Model

Abstract: This paper examines the effects of adjustments in the key policy rate, included as the interbank rate, on the Swedish household sector debt from the second quarter of 2000 to the third quarter of 2019. The effect is examined through a Vector Error-Correction (VEC) model to determine if it provides results that are aligned with the given theory. The research question is “Does an increase in the repo rate temporarily decrease the Swedish household sector debt?”. The theory suggests that an increase in the policy rate will have a short-run negative effect on household debt. To short-run effect the economy and the inflation is also the intention of the central bank of Sweden, called Riksbanken. With regards to the short-run dynamics, the previous researchers have constructed quite simple models of estimation and concluded contradictory results. The VECM distinguish from the previous models by a long-run equilibrium. The model concludes a short-run negative effect on debt for an increase in the policy rate, with an insignificant long-run equilibrium. By regard to this, the findings of this paper agree with the given theory. The ongoing increase in the policy rate conducted by Riksbanken can be justified by this paper.