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The macroprudential toolkit: effectiveness and interactions

Author

Listed:
  • Stephen Millard

    (Bank of England)

  • Margarita Rubio

    (Nottingham University)

  • Alexandra Varadi

    (Bank of England)

Abstract

We use a DSGE model with financial frictions, leverage limits on banks, loan to value (LTV) limits and debt‑service ratio (DSR) limits on mortgage borrowing to examine: i) the effects of different macroprudential policies on key macro aggregates; ii) their interaction with each other and with monetary policy; and iii) their effects on the volatility of key macroeconomic variables and on welfare. We find that capital requirements can nullify the effects of financial frictions and reduce the effects of shocks emanating from the financial sector on the real economy. LTV limits, on their own, are not sufficient to constrain household indebtedness in booms, though can be used with capital requirements to keep DSRs under control. Finally, DSR limits lead to a significant decrease in the volatility of lending, consumption and inflation, since they disconnect the housing market from the real economy. Overall, DSR limits are welfare improving relative to any other macroprudential tool.

Suggested Citation

  • Stephen Millard & Margarita Rubio & Alexandra Varadi, 2021. "The macroprudential toolkit: effectiveness and interactions," Bank of England working papers 902, Bank of England.
    • Handle: RePEc:boe:boeewp:0902
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    References listed on IDEAS

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    1. The macroprudential toolkit: effectiveness and interactions
      by Christian Zimmermann in NEP-DGE blog on 2021-01-26 18:45:13

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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