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New Ways of Modeling Loan-to-Income Distributions and their Evolution in Time - A Probability Copula Approach

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  • Gerth, Florian
  • Temnov, Grigory

Abstract

This paper analyzes the effects of recently introduced macroprudential policies on the financial stability of the Irish economy. We use an empirical approach that is based on the statistical modeling of bivariate loan-income distributions, and find that for First Time Buyers (FTBs) borrowing limits improve financial stability risks; meaning, excessive lending has been effectively restricted. Nonetheless, preliminary evidence for Second Subsequent Buyers (SSBs) shows that financial stability actually worsens. This is because, for the sample at hand, imposing borrowing limits leads lower-income earners to increase their mortgage-borrowing. This finding challenges the one size fits all approach of Irish policy makers.

Suggested Citation

  • Gerth, Florian & Temnov, Grigory, 2021. "New Ways of Modeling Loan-to-Income Distributions and their Evolution in Time - A Probability Copula Approach," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 217-236.
    • Handle: RePEc:eee:reveco:v:71:y:2021:i:c:p:217-236
    DOI: 10.1016/j.iref.2020.08.022
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    More about this item

    Keywords

    Macro prudential; Financial stability; Mortgages; Probability copula; Bunching; Ireland;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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