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LTV regulation and housing bubbles

Author

Listed:
  • Claire Océane Chevallier

    (Université du Luxembourg (Extramural Research Fellow))

  • Sarah El Joueidi

    (American University of Beirut and Université du Luxembourg (Extramural Research Fellow))

Abstract

This paper develops a dynamic general equilibrium model in innite ho- rizon, with an endogenous banking sector, market sensitive regulatory con- straints, and in which deterministic rational housing bubbles may emerge. We are interested in the conditions under which housing bubbles may emerge and their impact on the economy. We show that 1) when agents face a LTV regulation, two dierent equilibria may emerge and coexist: a bubbleless and a housing bubble equilibria; 2) housing bubbles increase banks' size; 3) when banks face operational costs, housing bubbles reduce welfare. In an extension of the model we introduce a stochastic banking bubble and show that the combination of two market sensitive macroprudential regu- lations, LTV and VaR regulations, allows housing and banking bubbles to arise simultaneously. Their interaction amplies banks' balance sheet size. The welfare impact is positive.

Suggested Citation

  • Claire Océane Chevallier & Sarah El Joueidi, 2022. "LTV regulation and housing bubbles," DEM Discussion Paper Series 22-09, Department of Economics at the University of Luxembourg.
    • Handle: RePEc:luc:wpaper:22-09
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    More about this item

    Keywords

    Banking bubble; Dynamic general equilibrium; Housing bubbles Innitely lived agents; Loan-to-Value; Market sensitive regulations.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G1 - Financial Economics - - General Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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