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The impact of Covid-19 on productivity

Author

Listed:
  • Stephen Millard,
  • Margarita Rubio
  • Alexandra Varadi

Abstract

We use a DSGE model with financial frictions, leverage limits on banks, loan-to-value 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 house- hold indebtedness in booms, though can be used with capital requirements to keep debt-service ratios 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, 2020. "The impact of Covid-19 on productivity," Discussion Papers 2020/14, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    • Handle: RePEc:not:notcfc:2020/14
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    File URL: https://www.nottingham.ac.uk/cfcm/documents/papers/2020/cfcm-2020-14.pdf
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    References listed on IDEAS

    as
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    Keywords

    Macroprudential Policy; Monetary Policy; Leverage Ratio; Affordability Constraint; Col-lateral Constraint.;
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