Assessing the Macroeconomic Costs and Benefits of Borrower Based Measures (Evidence From Ireland)

We examine the costs and benefits of LTV and LTI borrower based measures (BBM) changes on future consumption growth rates. Costs are established using a semi-structural model of the Irish economy, which quantifies how macroprudential policy changes affect forecasts for expected consumption growth. Benefits appear in the form of changes to the tail risk to consumption growth, at the 5th percentile, over a forecast horizon of up to 4 years, given the same macroprudential policy change within a novel consumption at risk framework. We find that policy tightening actions involving LTV and LTI are associated with dampened central, or expected, consumption growth rates but appear broadly correlated with less adverse consumption growth tail risk. The timing of BBM adjustments is shown to be highly important, taking the phase of the financial cycle into account.