Loan-to-Value Shocks and Macroeconomic Stability

Emmanuel De Veirman

Working Papers from DNB

Abstract: This paper documents the macroeconomic effects of changes in downpayment re- quirements on mortgage loans in a model where investment is undertaken by collateral- constrained agents. I find that a permanent tightening in lending standards substan- tially lowers aggregate spending in the short run and permanently lowers house prices. These effects are much larger than in earlier findings from a model where unconstrained agents invest. Furthermore, I document that the amplification of macroeconomic shocks is much stronger when steady-state loan-to-value ratios are high. The loan-to-value shock itself is amplified to a greater extent when the loan-to-value ratio starts out at a higher level. In that sense, the effects of loan-to-value ratios on the economy are non-linear.

Keywords: Collateral effect; financial accelerator (search for similar items in EconPapers)
JEL-codes: D11 D50 D52 E21 (search for similar items in EconPapers)
Date: 2023-01
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:763

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