Macroprudential Policy, Banking and the Real Estate Sector

We develop and estimate a structural model that explicitly characterises the dynamic nature of the interactions, feedbacks and spillovers between macroprudential policy, and the banking and real estate sectors. Using Irish data we find that borrower-based macroprudential instruments such as LTI and LTV ratios significantly affect credit demand, while intermediary-based instruments such as LTD and capital ratios are important determinants of credit supply. We simulate two counterfactual scenarios to demonstrate the model's usefulness for policy analysis. We show that the boom-bust dynamics in Irish credit growth and property prices could have been significantly dampened if a macroprudential regime that managed credit conditions through a credit-based LTV rule had been in operation. Finally, notwithstanding its enhancement of banks' balance sheet resilience, we show that the implementation of a countercyclical capital buffer would have had a relatively weak impact on real and financial volatility.