The Impact of Monetary Policy on Household Debt Sustainability: Evidence from Sweden (2015–2024)

Abstract

This thesis examines how changes in monetary policy are associated with household debt sustainability in Sweden over the period 2015–2024. The analysis focuses on the dynamic relationship between the Riksbank’s policy rate and the household debt-to-income ratio. To capture delayed and persistent adjustment patterns, the study employs vector autoregression (VAR) and autoregressive distributed lag (ARDL) models. The results indicate that household debt in Sweden is highly persistent and does not respond immediately to changes in the policy rate. Impulse response analysis shows that monetary tightening is associated with a gradual and moderate decline in the debt-to-income ratio over the medium run rather than abrupt adjustment. The ARDL estimates reinforce this finding by highlighting strong inertia in household debt dynamics and limited short-run sensitivity to monetary policy changes. Overall, the findings suggest that monetary policy influences household debt sustainability primarily through slow-moving balance sheet adjustments. This has important implications for financial stability, indicating that while monetary tightening can moderate household indebtedness, its effects unfold gradually and may need to be complemented by macroprudential measures.