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On the (in)effectiveness of LTV regulation in a multiconstraint framework

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  • Anna Grodecka

Abstract

Models in the macro-housing literature often assume that borrowers are constrained exclusively by the loan-to-value (LTV) ratio. I explore an alternative arrangement where borrowers are constrained by the feasibility of repayment, but choose a house of maximum permissible size conditional on the LTV restriction. This assumption, which is arguably more consistent with mortgage lending practices in countries with multiple borrowing constraints, yields results that disagree with much of the existing literature. In particular, I find that policy designed to lower the maximum permissible LTV ratio may actually increase house prices in equilibrium and leave the debt-to-GDP ratio unchanged. I use the DSGE model to study the macroprudential policies in a multiconstrained framework. The proposed model will change some of the conclusions about the effectiveness of macroprudential policies in countries like Sweden, where borrowers face multiple borrowing constraints at the same time.

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  • Anna Grodecka, 2017. "On the (in)effectiveness of LTV regulation in a multiconstraint framework," EcoMod2017 10529, EcoMod.
    • Handle: RePEc:ekd:010027:10529
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    References listed on IDEAS

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    1. Sami Alpanda & Gino Cateau & Césaire Meh, 2018. "A policy model to analyze macroprudential regulations and monetary policy," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 51(3), pages 828-863, August.
    2. Fabia Carvalho & Fabia A. de Carvalho & Silvio Michael de Azevedo Costa & Marcos Ribeiro de Castro, 2013. "Traditional and matter-of-fact financial frictions in a DSGE model for Brazil: the role of macroprudential instruments and monetary policy," EcoMod2013 5145, EcoMod.
    3. Mr. Jiaqian Chen & Mr. Francesco Columba, 2016. "Macroprudential and Monetary Policy Interactions in a DSGE Model for Sweden," IMF Working Papers 2016/074, International Monetary Fund.
    4. Daniel Greenwald, 2016. "The Mortgage Credit Channel of Macroeconomic Transmission," 2016 Meeting Papers 1551, Society for Economic Dynamics.
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