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Collateral Requirements: Macroeconomic Fluctuations and Macro-Prudential Policy

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  • Caterina Mendicino

Abstract

What are the macroeconomic implications of higher leveraged borrowing? To address this question, we develop a business cycle model with credit frictions in which firms reallocate capital among themselves through the credit market. We find that looser collateral requirements moderate the sensitivity of investment and output to changes in productivity but sharpen the response to shocks originated in the credit market. This result poses a challenge to the design of a macro-prudential policy framework that aims to mitigate pro-cyclicality in the financial market and improve macroeconomic stability. We document that, contrary to discretionary lower caps on loan-to-value ratios, time-varying caps that counter-cyclically respond to indicators of financial imbalances are successful in smoothing credit-cycles without increasing the sensitivity of the economy to real shocks. Further, countercyclical loan-to-value ratios also dampen macroeconomic volatility without reducing the size of the economy.

Suggested Citation

  • Caterina Mendicino, 2012. "Collateral Requirements: Macroeconomic Fluctuations and Macro-Prudential Policy," Working Papers w201211, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w201211
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    Cited by:

    1. Lambertini, Luisa & Mendicino, Caterina & Punzi, Maria Teresa, 2017. "Expectations-driven cycles in the housing market," Economic Modelling, Elsevier, vol. 60(C), pages 297-312.
    2. Hartmann, Philipp, 2015. "Real estate markets and macroprudential policy in Europe," Working Paper Series 1796, European Central Bank.
    3. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2019. "Credit Supply and the Housing Boom," Journal of Political Economy, University of Chicago Press, vol. 127(3), pages 1317-1350.
    4. Lambertini, Luisa & Mendicino, Caterina & Teresa Punzi, Maria, 2013. "Leaning against boom–bust cycles in credit and housing prices," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1500-1522.
    5. Jensen, Henrik & Ravn, Søren Hove & Santoro, Emiliano, 2018. "Changing credit limits, changing business cycles," European Economic Review, Elsevier, vol. 102(C), pages 211-239.

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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