Working Paper: CEPR ID: DP14564
Authors: Jesper Lind; Daria Finocchiaro; Karl Walentin; Jack Chen
Abstract: What are the effects of different borrower-based macroprudential tools when both real and nominal interest rates are low? We study this question in a New Keynesian model featuring long-term debt, housing transaction costs and a zero lower bound constraint on policy rates. We find that the long-term costs, in terms of output losses, of all the macroprudential tools we consider are moderate. However, the short-term costs differ substantially between tools. Moreover, the costs vary depending on the current state of economy and monetary policy. Specifically, a loan-to-value tightening is more than three times as contractionary compared to a loan-to-income tightening when debt is high and monetary policy cannot accommodate.
Keywords: household debt; zero lower bound; New Keynesian model; collateral and borrowing constraints; mortgage interest deductibility; housing prices
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroprudential tightening (LTV) (G21) | output (C67) |
| macroprudential tightening (LTV) (G21) | consumption (E21) |
| high debt level + macroprudential tightening (LTV) (G21) | decline in house prices (R31) |
| decline in house prices (R31) | borrowing capacity (H74) |
| borrowing capacity (H74) | aggregate demand (E00) |
| macroprudential tightening (LTI) (G21) | output (C67) |
| macroprudential tightening (DSTI) (E63) | output (C67) |