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Addressing household indebtedness: Monetary, fiscal or macroprudential policy?

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  • Alpanda, Sami
  • Zubairy, Sarah

Abstract

In this paper, we build a dynamic stochastic general-equilibrium model with housing and household debt, and compare the effectiveness of monetary policy, housing-related fiscal policy, and macroprudential regulations in reducing household indebtedness. Excessive household debt arises due to exuberance shocks on house price expectations, which drive a wedge between the actual and the underlying fundamental value of houses. The estimated model also features long-term fixed-rate borrowing and lending across two types of households, and differentiates between the flow and the stock of household debt. Our main findings can be summarized as follows: (i) Monetary tightening is able to reduce the stock of real mortgage debt, but leads to an increase in the household debt-to-income ratio. (ii) Among the policy tools we consider, tightening in mortgage interest deduction and regulatory loan-to-value (LTV) are the most effective and least costly in reducing household debt, followed by increasing property taxes and monetary tightening. (iii) Although mortgage interest deduction is a broader tool than regulatory LTV, and therefore potentially more costly in terms of output loss, it is effective in reducing overall mortgage debt, since its direct reach also extends to home equity loans. (iv) Lowering regulatory LTV and mortgage interest deductions from their current levels would be welfare improving, while we find weak support for systematic leaning against household imbalances through monetary policy.

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  • Alpanda, Sami & Zubairy, Sarah, 2017. "Addressing household indebtedness: Monetary, fiscal or macroprudential policy?," European Economic Review, Elsevier, vol. 92(C), pages 47-73.
  • Handle: RePEc:eee:eecrev:v:92:y:2017:i:c:p:47-73
    DOI: 10.1016/j.euroecorev.2016.11.004
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    Cited by:

    1. Sami Alpanda & Alexander Ueberfeldt, 2016. "Should Monetary Policy Lean Against Housing Market Booms?," Staff Working Papers 16-19, Bank of Canada.
    2. David Finck & Joerg Schmidt & Peter Tillmann, 2018. "Mortgage Debt and Time-Varying Monetary Policy Transmission," MAGKS Papers on Economics 201809, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    3. Oleksiy Kryvtsov & Miguel Molico & Ben Tomlin, 2015. "On the Nexus of Monetary Policy and Financial Stability: Recent Developments and Research," Discussion Papers 15-7, Bank of Canada.
    4. repec:spr:empeco:v:54:y:2018:i:2:d:10.1007_s00181-016-1222-1 is not listed on IDEAS
    5. Grodecka, Anna, 2017. "On the effectiveness of loan-to-value regulation in a multiconstraint framework," Working Paper Series 347, Sveriges Riksbank (Central Bank of Sweden).
    6. Kim, Soyoung & Mehrotra, Aaron, 2017. "Effects of monetary and macro-prudential policies – evidence from inflation targeting economies in the Asia-Pacific region and potential implications for China," BOFIT Discussion Papers 4/2017, Bank of Finland, Institute for Economies in Transition.
    7. repec:ijc:ijcjou:y:2017:q:3:a:9 is not listed on IDEAS
    8. Christian Friedrich & Kristina Hess & Rose Cunningham, 2015. "Monetary Policy and Financial Stability: Cross-Country Evidence," Staff Working Papers 15-41, Bank of Canada.
    9. Gregory H. Bauer & Eleonora Granziera, 2017. "Monetary Policy, Private Debt, and Financial Stability Risks," International Journal of Central Banking, International Journal of Central Banking, vol. 13(3), pages 337-373, September.
    10. Nurlan Turdaliev & Yahong Zhang, 2017. "Household Debt, Macroprudential Rules, and Monetary Policy," Working Papers 1704, University of Windsor, Department of Economics, revised May 2017.
    11. repec:eee:moneco:v:90:y:2017:i:c:p:193-213 is not listed on IDEAS

    More about this item

    Keywords

    Household debt; Monetary policy; Housing-related fiscal policy; Regulatory LTV;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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