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House prices, capital inflows and macroprudential policy

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  • Mendicino, Caterina
  • Punzi, Maria Teresa

Abstract

This paper evaluates the monetary and macroprudential policies that mitigate the procyclicality arising from the interlinkages between current account deficits and financial vulnerabilities. We develop a two-country dynamic stochastic general equilibrium (DSGE) model with heterogeneous households and collateralised debt. The model predicts that external shocks are important in driving current account deficits that are coupled with run-ups in house prices and household debt. In this context, optimal policy features an interest-rate response to credit and a LTV ratio that countercyclically responds to house price dynamics. By allowing an interest-rate response to changes in financial variables, the monetary policy authority improves social welfare, because of the large welfare gains accrued to the Savers. The additional use of a countercyclical LTV ratio that responds to house prices, increases the ability of borrowers to smooth consumption over the cycle and is Pareto improving. Domestic and foreign shocks account for a similar fraction of the welfare gains delivered by such a policy.

Suggested Citation

  • Mendicino, Caterina & Punzi, Maria Teresa, 2014. "House prices, capital inflows and macroprudential policy," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 337-355.
  • Handle: RePEc:eee:jbfina:v:49:y:2014:i:c:p:337-355
    DOI: 10.1016/j.jbankfin.2014.06.007
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    1. Elmer Sánchez León, 2016. "Mortgage Credit: Lending and Borrowing Constraints in a DSGE Framework," IHEID Working Papers 15-2016, Economics Section, The Graduate Institute of International Studies.
    2. Elmer Sánchez León, 2018. "Mortgage Credit: Lending and Borrowing Constraints in a DSGE Model," Working Papers 125, Peruvian Economic Association.
    3. Punzi, Maria Teresa & Kauko, Karlo, 2015. "Testing the global banking glut hypothesis," Journal of Financial Stability, Elsevier, vol. 19(C), pages 128-151.
    4. Punzi, Maria Teresa & Rabitsch, Katrin, 2018. "Effectiveness of macroprudential policies under borrower heterogeneity," Journal of International Money and Finance, Elsevier, vol. 85(C), pages 251-261.
    5. Lambertini, Luisa & Mendicino, Caterina & Punzi, Maria Teresa, 2017. "Expectations-driven cycles in the housing market," Economic Modelling, Elsevier, vol. 60(C), pages 297-312.
    6. Ag�nor, Pierre-Richard & Gambacorta, Leonardo & Kharroubi, Enisse & Lombardo, Giovanni & Pereira da Silva, Luiz A., 2017. "The International Dimensions of Macroprudential Policies," CEPR Discussion Papers 12108, C.E.P.R. Discussion Papers.
    7. Chris Garbers & Guangling Liu, 2017. "Macroprudential policy and foreign interest rate shocks: A comparison of different instruments and regulatory regimes," Working Papers 15/2017, Stellenbosch University, Department of Economics.
    8. Greenwood-Nimmo, Matthew & Tarassow, Artur, 2016. "Monetary shocks, macroprudential shocks and financial stability," Economic Modelling, Elsevier, vol. 56(C), pages 11-24.
    9. Baptista, Rafa & Farmer, J. Doyne & Hinterschweiger, Marc & Low, Katie & Tang, Daniel & Uluc, Arzu, 2016. "Macroprudential policy in an agent-based model of the UK housing market," Bank of England working papers 619, Bank of England.
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    12. Huber, Florian & Punzi, Maria Teresa, 2017. "The shortage of safe assets in the US investment portfolio: Some international evidence," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 318-336.
    13. Punzi, Maria Teresa & Chantapacdepong, Pornpinun, 2017. "Spillover Effects of Unconventional Monetary Policy in Asia and the Pacific," ADBI Working Papers 630, Asian Development Bank Institute.
    14. Gross, Marco & Población, Javier, 2017. "Assessing the efficacy of borrower-based macroprudential policy using an integrated micro-macro model for European households," Economic Modelling, Elsevier, vol. 61(C), pages 510-528.
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    17. Pierre-Richard Agénor & Pengfei Jia, 2017. "Macroprudential Policy Coordination in a Currency Union'," Centre for Growth and Business Cycle Research Discussion Paper Series 235, Economics, The Univeristy of Manchester.
    18. Milcheva, Stanimira & Zhu, Bing, 2016. "Bank integration and co-movements across housing markets," Journal of Banking & Finance, Elsevier, vol. 72(S), pages 148-171.
    19. Jiang, Liang & Phillips, Peter C.B. & Yu, Jun, 2015. "New methodology for constructing real estate price indices applied to the Singapore residential market," Journal of Banking & Finance, Elsevier, vol. 61(S2), pages 121-131.
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    More about this item

    Keywords

    House prices; Financial frictions; Global imbalances; Saving glut; Dynamic loan-to value ratios; Monetary policy; Optimized simple rules;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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