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Macroprudential policy and foreign interest rate shocks: A comparison of loan-to-value and capital requirements

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  • Garbers, Chris
  • Liu, Guangling

Abstract

This paper presents a generic small open economy real business cycle model with domestic and foreign borrowing. We incorporate capital requirements and loan-to-value regulation into this framework, and subject the model to a positive foreign interest rate shock that raises the country risk premium and reduces the supply of foreign funds. The results show that both these macroprudential instruments can attenuate the impact of such a shock and that their joint application is Pareto optimal. Loan-to-value regulation delivers the largest shock attenuation benefits but entail a welfare tradeoff between borrowers and savers. Capital requirements improve the welfare of both agents, but have smaller shock attenuation benefits. Lastly, we find that a macroprudential response to foreign interest rate shocks can benefit both financial and macroeconomic stability.

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  • Garbers, Chris & Liu, Guangling, 2018. "Macroprudential policy and foreign interest rate shocks: A comparison of loan-to-value and capital requirements," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 683-698.
    • Handle: RePEc:eee:reveco:v:58:y:2018:i:c:p:683-698
    DOI: 10.1016/j.iref.2018.07.008
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    Cited by:

    1. Ekinci, Mehmet Fatih & Özcan, Gülserim, 2022. "Macroprudential policies and current account balance," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 768-777.
    2. Guangling Liu & Thabang Molise, 2019. "The effectiveness of the counter-cyclical loan-to-value regulation: Generic versus sector-specific rules," Working Papers 21/2019, Stellenbosch University, Department of Economics.
    3. Shaun de Jager & Riaan Ehlers & Keabetswe Mojapelo & Pieter Pienaar, 2021. "Shortterm impacts and interaction of macroprudential policy tools," Working Papers 11020, South African Reserve Bank.
    4. Liu, Guangling & Molise, Thabang, 2021. "The effectiveness of the counter-cyclical loan-to-value regulation: Generic versus sector-specific rules," International Review of Economics & Finance, Elsevier, vol. 72(C), pages 270-288.
    5. Lenhle Dlamini & Harold Ngalawa, 2022. "Macroprudential policy and house prices in an estimated Dynamic Stochastic General Equilibrium model for South Africa," Australian Economic Papers, Wiley Blackwell, vol. 61(2), pages 304-336, June.
    6. Czerniak, Adam & Borowski, Jakub & Boratyński, Jakub & Rosati, Dariusz, 2020. "Asset price bubbles in a monetary union: Mind the convergence gap," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 288-302.

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    More about this item

    Keywords

    Macroprudential policy; Open economy macroeconomics; Financial stability; Business cycle; Equity premium; Welfare; DSGE;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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