Insights on the Greek Economy from the 3d Macro Model

Loan-to-Value Ratio Limits: An Exploration for Greece

“…Figures 1 -5 depict the steady-state properties of the model, when the loan-tovalue ratio is allowed to be endogenously determined as we vary the capital requirements ratio. This is the benchmark set of results for the Greek calibration, which were also presented in Balfoussia and Papageorgiou (2016). The key intuition of the model is that there is a humped shaped steady-state relationship between capital requirements and social welfare, implying a trade-off between the two (see Figure 1).…”

“…The model is calibrated to the Greek economy at a quarterly frequency. The calibration strategy and the data used are the same as in Balfoussia and Papageorgiou (2016). The data sources are Eurostat and the Bank of Greece, unless otherwise indicated, and span the period 2003-2010.…”

“…The adjustment cost parameters for capital and housing and the shock persistence parameters are those employed in Clerc et al (2015). We set the reference value of the loan-to-value ratio, 𝑥̅ 0 𝑚 , equal to 0.7162 following Balfoussia and Papageorgiou (2016). Note that in their model the loan-to-value ratio is a choice variable of the borrowing households and its long-run value is pinned down endogenously from the respective first order condition.…”

“…It thus corresponds to Figure 1 -though not exactly, as in Figure 1 the loan-to-value ratio is endogenously determined at all levels of capital requirements and thus 6 In this case, the loan-to-value ratio, 𝑥 𝑡+1 𝑚 , is treated as a choice variable in the maximization problem of the borrowing households and we substitute Equation (30) that refers to the macroprudential policy rule with the first order condition with respect to 𝑥 𝑡+1 𝑚 . For details see Clerc et al, (2015) and Balfoussia and Papageorgiou (2016). Recall that the implied long-run value for 𝑥 𝑚 is the same as the one used in the benchmark calibration as described in the previous section.…”