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The Conduct of LTV Policy under Inflationary Shocks

Author

Listed:
  • Rubio, Margarita

    (University of Nottingham)

  • Yao, Fang

    (Central Bank of Ireland)

Abstract

This paper examines loan-to-value (LTV) policy as a macroprudential tool and its interactions with monetary policy in an inflationary environment. The combination of inflation shocks and collateral constraints introduces additional trade-offs for policymakers, emphasizing the need for coordination between macroprudential and monetary policies. Using a DSGE model with collateral constraints, we evaluate the implications of an optimized LTV rule for a welfare-based loss function that incorporates economic and financial stability. Our core finding indicates that, under inflation shocks, policy coordination reduces welfare-based losses compared to a non-coordination regime. In particular, the LTV rule is active (responding to cyclical factors, e.g. house prices) when monetary policy responds weakly to inflation shocks, but the LTV rule becomes passive (only responding to structural factors) when monetary policy chooses to be hawkish towards inflation.

Suggested Citation

  • Rubio, Margarita & Yao, Fang, 2025. "The Conduct of LTV Policy under Inflationary Shocks," Research Technical Papers 1/RT/25, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:1/rt/25
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    File URL: https://www.centralbank.ie/docs/default-source/publications/research-technical-papers/01rt25-the-conduct-of-ltv-policy-under-inflationary-shocks.pdf?sfvrsn=d378651a_6
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    More about this item

    Keywords

    LTV policy; Monetary Policy; macroprudential policy coordination; collateral constraints; financial friction; cost-push shocks.;
    All these keywords.

    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
    • 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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