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Housing sector and optimal macroprudential policy in an estimated DSGE model for Luxembourg

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  • Ibrahima Sangaré

Abstract

This study investigates the optimal macroprudential policies for Luxembourg using an estimated closed-economy DSGE model. The model features a monopolistically competitive banking sector, a collateral constraint and an explicit differentiation between the flow and the stock of household mortgage debt. Based on a welfare-oriented approach and in a context of easy monetary policy environment, we first find that the non-joint optimal loan-to-value (LTV) and risk weighted capital requirement (RW) ratios for Luxembourg seem to be 90% and 30%, respectively, while the joint optimal ratios are found to be 100% and 10% respectively. Our results from the combination of instruments suggest that the policy scenario that provides better stabilization effects on mortgage credits isn’t necessarily the one that is welfare improving. In other words, we find a complementarity between LTV and RW in terms of welfare, while their optimal combination diminishes the stabilization effects on mortgage debt and house prices. However, the time-varying and endogenous rules for LTV and RW improve the social welfare and better stabilizes mortgage loans and house prices compared to their static exogenous ratios. We further find that the optimal interactions between LTV and RW ratios in our modelling framework exhibit a convex shape. It should be recalled that the results are conditional on the model’s specific assumptions.

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  • Ibrahima Sangaré, 2019. "Housing sector and optimal macroprudential policy in an estimated DSGE model for Luxembourg," BCL working papers 129, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp129
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    Cited by:

    1. William Gatt & Noel Rapa & Luca Brugnolini, 2020. "MEDSEA-FIN A DSGE model of the Maltese economy with housing and financial frictions," CBM Working Papers WP/04/2020, Central Bank of Malta.
    2. Alban Moura, 2020. "LED: An estimated DSGE model of the Luxembourg economy for policy analysis," BCL working papers 147, Central Bank of Luxembourg.

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    More about this item

    Keywords

    LTV; Risk weights; optimal macroprudential policy; combination of macroprudential instruments;
    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
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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