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Housing market dynamics and macroprudential policies

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  • Gabriel Bruneau
  • Ian Christensen
  • Césaire Meh

Abstract

In this paper, we analyze the implications of macroprudential and monetary policies for credit cycles, housing market stability and spillovers to consumption. We consider a countercyclical loan-to-value (LTV) policy that responds to a credit-to-income ratio, and we compare its effectiveness with a permanent tightening of the LTV ratio and a monetary policy rule that responds to credit. To this end, we construct a dynamic stochastic general equilibrium model with housing market, household debt and collateral constraints, and we estimate it with Canadian data using Bayesian methods. Our study suggests that a countercyclical LTV ratio is a useful policy to reduce spillovers from the housing market into consumption and to lean against housing market boombust cycles. It performs better than the permanent tightening of the LTV ratioa policy that has been used in a number of countriesand the monetary policy rule, both in terms of the stabilization of household indebtedness and spillovers into consumption. Monetary policy that leans against the wind is the least desirable due to its large adverse consequences on the real economy.

Suggested Citation

  • Gabriel Bruneau & Ian Christensen & Césaire Meh, 2018. "Housing market dynamics and macroprudential policies," Canadian Journal of Economics, Canadian Economics Association, vol. 51(3), pages 864-900, August.
  • Handle: RePEc:cje:issued:v:51:y:2018:i:3:p:864-900
    DOI: 10.1111/caje.12346
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    2. Dąbrowski, Marek A. & Widiantoro, Dimas Mukhlas, 2022. "Effectiveness and conduct of macroprudential policy in Indonesia in 2003-2020: Evidence from the structural VAR models," MPRA Paper 112963, University Library of Munich, Germany.
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    4. Maria Chiara Cavalleri & Boris Cournède & Volker Ziemann, 2019. "Housing markets and macroeconomic risks," OECD Economics Department Working Papers 1555, OECD Publishing.

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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