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Mitigating the deadly embrace in financial cycles: Countercyclical buffers and loan-to-value limits

In: Global Economic Modeling A Volume in Honor of Lawrence R. Klein

Author

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  • Jaromir Benes
  • Douglas Laxton
  • Joannes Mongardini

Abstract

This paper presents a new version of MAPMOD (Mark II) to study the effectiveness of macroprudential regulations. We extend the original model by explicitly modeling the housing market. We show how household demand for housing, house prices, and bank mortgages are intertwined in what we call a deadly embrace. Without macroprudential policies, this deadly embrace naturally leads to housing boom and bust cycles, which can be very costly for the economy, as shown by the Global Financial Crisis of 2008-09.

Suggested Citation

  • Jaromir Benes & Douglas Laxton & Joannes Mongardini, 2018. "Mitigating the deadly embrace in financial cycles: Countercyclical buffers and loan-to-value limits," World Scientific Book Chapters,in: Global Economic Modeling A Volume in Honor of Lawrence R. Klein, chapter 5, pages 90-111 World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9789813220447_0005
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    2. Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
    3. Jaromir Benes & Michael Kumhof & Douglas Laxton, 2014. "Financial Crises in DSGE Models; Selected Applications of MAPMOD," IMF Working Papers 14/56, International Monetary Fund.
    4. Charles A. E. Goodhart & Anil K Kashyap & Dimitrios P. Tsomocos & Alexandros P. Vardoulakis, 2013. "An Integrated Framework for Analyzing Multiple Financial Regulations," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 109-144, January.
    5. Charles A.E. Goodhart & Anil K. Kashyap & Dimitrios P. Tsomocos & Alexandros P. Vardoulakis, 2012. "Financial Regulation in General Equilibrium," NBER Working Papers 17909, National Bureau of Economic Research, Inc.
    6. Michael Brei & Leonardo Gambacorta, 2014. "The leverage ratio over the cycle," BIS Working Papers 471, Bank for International Settlements.
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    Cited by:

    1. Lozej, Matija & Rannenberg, Ansgar, 2017. "The macroeconomic effects of the regulatory LTV and LTI ratios in the Central Bank of Ireland's DSGE model," Economic Letters 04/EL/17, Central Bank of Ireland.
    2. R√ľnstler, Gerhard & Balfoussia, Hiona & Burlon, Lorenzo & Buss, Ginters & Comunale, Mariarosaria & De Backer, Bruno & Dewachter, Hans & Guarda, Paolo & Haavio, Markus & Hindrayanto, Irma & Iskrev, Nik, 2018. "Real and financial cycles in EU countries - Stylised facts and modelling implications," Occasional Paper Series 205, European Central Bank.
    3. Bank for International Settlements, 2016. "Experiences with the ex ante appraisal of macroprudential instruments," CGFS Papers, Bank for International Settlements, number 56.

    More about this item

    Keywords

    Econometrics; Modeling; International Economics;

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics

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