The effect of borrower-specific loan-to-value policies on household debt, wealth inequality and consumption volatility: An agent-based analysis

Ruben Tarne, Dirk Bezemer and Thomas Theobald

Journal of Economic Dynamics and Control, 2022, vol. 144, issue C

Abstract: This paper analyses the effects of borrower-specific credit constraints on macroeconomic outcomes in an agent-based housing market model, calibrated using UK household survey data. We apply different Loan-to-Value (LTV) caps for different types of agents: first-time buyers, second and subsequent buyers, and buy-to-let investors. We then analyse the outcomes on household debt, wealth inequality and consumption volatility. The households’ consumption function, in the model, incorporates a wealth term and income-dependent marginal propensities to consume. These characteristics cause the consumption-to-income ratios to move procyclically with the housing cycle. In line with the empirical literature, LTV caps in the model are overall effective while generating (distributional) side effects. Depending on the specification, we find that borrower-specific LTV caps affect household debt, wealth inequality and consumption volatility differently, mediated by changes in the housing market transaction patterns of the model. Restricting investors’ access to credit leads to substantial reductions in debt, wealth inequality and consumption volatility. Limiting first-time and subsequent buyers produces only weak effects on household debt and consumption volatility, while limiting first-time buyers even increases wealth inequality. Hence, our findings emphasise the importance of applying borrower-specific macroprudential policies and, specifically, support a policy approach of primarily restraining buy-to-let investors’ access to credit.

Keywords: Agent-based modelling; Macroprudential regulation; Household indebtedness; Housing market; Wealth inequality (search for similar items in EconPapers)
JEL-codes: C63 E58 G51 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188922002305
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:144:y:2022:i:c:s0165188922002305

DOI: 10.1016/j.jedc.2022.104526

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().