No abstract

This paper evaluates the macroeconomic effects of macroprudential policy measures consisting of changes in loan-to-value ratios in the euro area. The analysis is carried out within a fully structural, multi-country model, that prominently includes financial frictions and a banking sector. Our main findings suggest that a permanent LTV tightening in a small euro area economy leads to a long-run decline in lending to the private sector. The short-run impact depends crucially on the policy design, being less pronounced when the measure is phased-in. This is consistent with policy goals of curbing credit growth but avoiding an abrupt immediate contraction in lending. A policy measure introduced at the euro area level implies larger long-run effects but the short-run recessionary impact is attenuated by the monetary policy response.

The paper investigates whether the institutional arrangements that determine the conduct of monetary and prudential policies influence policymakers' actions in pursuing their designated mandates. Employing recently developed dynamic heterogeneous panel methods and using data for 25 industrialized countries from 1960 to 2018, we empirically assess whether central banks' main objective of inflation stability is compromised when assigned with both policy mandates manifested as inflation bias. Our results show that, once we appropriately control for relevant policy and institutional factors, the separation of macroprudential regulation and monetary policy does not have a significant effect on inflation outcomes.