A DSGE-Based Assessment of Nonlinear Loan-to-Value Policies: Evidence from Hong Kong

Funke, Michael; Paetz, Michael

doi:10.2139/ssrn.2049783

Cited by 31 publications

(26 citation statements)

References 22 publications

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“…19 This boom was one of the engines for Spain's economic growth before the bust. 20 Nevertheless, once the bust commenced, the crisis hit Spain more severely than it did other developed economies because of Spain's excessive dependence on the real estate industry. 21 When determining an appropriate macroprudential instrument, authorities faced serious implementation challenges, including de…ning their intermediate objectives and the source of the systemic risk they wanted to confront, determining the legal requirements for accomplishment, and ensuring ease of communication for policy implementation.…”

Section: Macroprudential Policy In the Eumentioning

confidence: 99%

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Coordinating macroprudential policies within the Euro area: The case of Spain

Rubio

Carrasco-Gallego²

2016

Economic Modelling

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In the aftermath of the global …nancial crisis, there is consensus on the need for macroprudential policies to promote …nancial stability. However, the optimal way to implement such policies in the Euro area is a question open to debate, given that countries have to coordinate. In this paper, we propose a two-country, two-sector monetary union dynamic stochastic general equilibrium model (DSGE) with housing to analyze the optimal implementation of macroprudential policies in the Euro area. Currently, Spain is the only country within the EU that has not established a macroprudential regulator. We use Spain as a natural experiment to study the e¤ects of a lack of coordination in the use of macroprudential policies in the European Monetary Union (EMU). We focus on a particular macroprudential policy, a rule regarding the loan-to-value ratio, which responds countercyclically to credit booms. We …nd that such a policy is welfare enhancing for the Euro area. Nevertheless, if one country does not implement the policy, but the rest of the EMU does, as in the current situation with Spain, this country still yields some bene…ts as a result of its partners'implementation of the policy because it gains from a more stable …nancial system without incurring any output costs. However, if all Euro countries actively implement the policy, the welfare gains for all of them are larger.

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Section: Macroprudential Policy In the Eumentioning

confidence: 99%

“…In the case of constrained consumers, the Lagrange multiplier on the borrowing constraint ( cv t ) appears in equations (17) and (20). As in Iacoviello (2005), the borrowing constraint is always binding, so that constrained individuals borrow the maximum amount that they are allowed to borrow and their saving is zero.…”

Section: Constrained Consumers (Borrowers)mentioning

confidence: 99%

Coordinating macroprudential policies within the Euro area: The case of Spain

Rubio

Carrasco-Gallego²

2016

Economic Modelling

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“…Lambertini et al (2011) consider a news driven model of the housing market and find that a countercyclical LTV rule responding to credit growth can stabilize the economy better than the interest rate. Funke and Paetz (2012) examine LTV rules in a New Keynesian model for Hong Kong and argue that a non-linear rule, responding only to very high changes in property prices performs better than a standard Taylor-like one. Based on experiments with three macroeconomic models, Angelini et al (2011) report substantial stabilization gains from a countercyclical CA rule introduced by the Basel III reform package.…”

Section: Introductionmentioning

confidence: 99%

Macroprudential policy and imbalances in the euro area

Brzoza‐Brzezina

Kolasa

Makarski

2015

Journal of International Money and Finance

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Since its creation the euro area suffered from imbalances between its core and peripheral members. This paper checks whether macroprudential policy applied to the peripheral countries could contribute to providing more macroeconomic stability in this region. To this end we build a two-economy macrofinancial DSGE model and simulate the effects of macroprudential policies under the assumption of asymmetric shocks hitting the core and the periphery. We find that macroprudential policy is able to partly make up for the loss of independent monetary policy in the periphery. Moreover, LTV policy seems more efficient than regulating capital adequacy ratios. However, for the policies to be effective, they must be decentralized. Area-wide policy is almost ineffective in this respect. JEL: E32, E44, E58

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“…The proportion of each type of borrower is …xed and exogenous. 10 Consumers can be constrained or unconstrained in the sense that constrained individuals need to collateralize their debt repayments in order to borrow from the …nancial intermediary. Interest payments in the next period cannot exceed a proportion of the future value of the current house stock.…”

Section: The Consumer' S Problemmentioning

confidence: 99%

Spain and the Crisis: Housing Prices, Credit and Macroprudential Policies

Rubio

Carrasco-Gallego

2017

Singapore Econ. Rev.

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In this paper, we propose a two-country, two sector monetary union DSGE model with housing.One of the countries is calibrated to represent the Spanish economy while the other one is the rest of the European monetary union. First, we illustrate how looser credit conditions coming from the Euro area, together with increases in housing demand, lead to an increase in house prices and credit in Spain. Then, we analyze to what extent, macroprudential policies could have avoided the excess in credit that triggered the …nancial crisis in Spain. We …nd that a countercyclical loan-to-value rule that mainly responds to house prices would have mitigated the credit boom in Spain. These results can also be applied to other countries facing similar problems in the housing sector and thinking about implementing macroprudential policies.

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A DSGE-Based Assessment of Nonlinear Loan-to-Value Policies: Evidence from Hong Kong

Cited by 31 publications

References 22 publications

Coordinating macroprudential policies within the Euro area: The case of Spain

Coordinating macroprudential policies within the Euro area: The case of Spain

Macroprudential policy and imbalances in the euro area

Spain and the Crisis: Housing Prices, Credit and Macroprudential Policies

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