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House prices and macroprudential policy in an estimated DSGE model of New Zealand

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  • Funke, Michael
  • Kirkby, Robert
  • Mihaylovski, Petar

Abstract

We analyse macroprudential and monetary policies and their interactions using an estimated dynamic stochastic general equilibrium (DSGE) model tailored to New Zealand. Our estimates show that monetary policy has large spillover effects on house prices, however it has not been a major driver of house prices in New Zealand which have instead been driven by sector-specific shocks. We consider macroprudential policies, including the loan-to-value restrictions that have been implemented in New Zealand. We find that loan-to-value restrictions reduce house prices with negligible effects on consumer prices, suggesting they can be used without derailing monetary policy. Efficient policy frontier analysis suggests macroprudential policy is a useful addition to monetary policy, and the two do not need to be coordinated. We estimate that the loan-to-value restrictions imposed in New Zealand in 2013 reduced house prices by 3.8% and that greater forward guidance on their duration would have made them more effective.

Suggested Citation

  • Funke, Michael & Kirkby, Robert & Mihaylovski, Petar, 2018. "House prices and macroprudential policy in an estimated DSGE model of New Zealand," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 152-171.
  • Handle: RePEc:eee:jmacro:v:56:y:2018:i:c:p:152-171
    DOI: 10.1016/j.jmacro.2018.01.006
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    Keywords

    Macroprudential policies; Housing; DSGE; Bayesian estimation; New Zealand;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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