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A DSGE-Based Assessment of Nonlinear Loan-to-Value Policies: Evidence from Hong Kong

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  • Funke, Michael

    ()
    (BOFIT)

  • Paetz, Michael

    (BOFIT)

Abstract

In the wake of the 2008-2009 global financial crisis, the macroeconomic discussion has returned to the topic of proactive macroprudential policies. One proactive approach, the use of loan-to-value (LTV) policies to curb booming property markets, has long been used by Hong Kong’s monetary authorities to actively manage and mitigate the potential fallout from housing price bubbles. Here, we analyse the merits of this countercyclical macroprudential policy in a New Keynesian DSGE model. We conclude that nonlinear LTV policy rules implemented in reaction to episodes of high property price inflation can limit transmission of housing price cycle effects to the real economy.

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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 11/2012.

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Length: 26 pages
Date of creation: 02 May 2012
Date of revision:
Handle: RePEc:hhs:bofitp:2012_011

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Keywords: macroprudential policy; DSGE model; loan-to-value ratio; Hong Kong;

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References

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  1. Luisa Lambertini & Caterina Mendicino & Maria Teresa Punzi, 2011. "Leaning Against Boom-Bust Cycles in Credit and Housing Prices," Working Papers CELEG 1104, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  2. Olivier Jeanne & Anton Korinek, 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," NBER Working Papers 16377, National Bureau of Economic Research, Inc.
  3. Dan Andrews & Aida Caldera Sánchez & Åsa Johansson, 2011. "Housing Markets and Structural Policies in OECD Countries," OECD Economics Department Working Papers 836, OECD Publishing.
  4. Holden, Tom, 2011. "Products, patents and productivity persistence: A DSGE model of endogenous growth," Dynare Working Papers 4, CEPREMAP.
  5. Michael Funke & Michael Paetz, 2011. "Housing Prices and the Business Cycle: An Empirical Application to Hong Kong," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 21112b, Hamburg University, Department of Economics.
  6. Deniz Igan & Heedon Kang, 2011. "Do Loan-To-Value and Debt-To-Income Limits Work? Evidence From Korea," IMF Working Papers 11/297, International Monetary Fund.
  7. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  8. Paolo Angelini & Stefano Neri & Fabio Panetta, 2011. "Monetary and macroprudential policies," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 801, Bank of Italy, Economic Research and International Relations Area.
  9. Giovanni Dell'Ariccia & Pau Rabanal & Christopher W. Crowe & Deniz Igan, 2011. "Policies for Macrofinancial Stability," IMF Staff Discussion Notes 11/02, International Monetary Fund.
  10. Benito, Andrew & Mumtaz, Haroon, 2009. "Excess Sensitivity, Liquidity Constraints, And The Collateral Role Of Housing," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 13(03), pages 305-326, June.
  11. Darracq Pariès, Matthieu & Notarpietro, Alessandro, 2008. "Monetary policy and housing prices in an estimated DSGE for the US and the euro area," Working Paper Series, European Central Bank 0972, European Central Bank.
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Cited by:
  1. Tom Holden & Michael Paetz, 2012. "Efficient simulation of DSGE models with inequality constraints," School of Economics Discussion Papers, School of Economics, University of Surrey 1612, School of Economics, University of Surrey.
  2. Margarita Rubio, 2014. "Macroprudential Policy Implementation in a Heterogeneous Monetary Union," Discussion Papers 2014/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  3. José A Carrasco-Gallego & Margarita Rubio, 2013. "Macroprudential and Monetary Policies: Implications for Financial Stability and Welfare," Discussion Papers 2013/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  4. Rubio, Margarita & Carrasco-Gallego, José A., 2012. "Macroprudential Measures, Housing Markets, and Monetary Policy," Dynare Working Papers 23, CEPREMAP.
  5. Michael Funke & Michael Paetz, 2011. "Housing Prices and the Business Cycle: An Empirical Application to Hong Kong," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 21112b, Hamburg University, Department of Economics.
  6. Eric Wong & Andrew Tsang & Steven Kong, 2014. "How Does Loan-To-Value Policy Strengthen Banks' Resilience to Property Price Shocks - Evidence from Hong Kong," Working Papers 032014, Hong Kong Institute for Monetary Research.
  7. Afanasyeva, Elena & Karasulu, Meral, 2013. "Interactions of Monetary and Macroprudential Policies in a Model of the Korean Economy," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79884, Verein für Socialpolitik / German Economic Association.

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