Leaning against boom–bust cycles in credit and housing prices

Luisa Lambertini, Caterina Mendicino and Maria Teresa Punzi

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 8, 1500-1522

Abstract: This paper studies the potential gains of monetary and macro-prudential policies that lean against house-price and credit cycles. We rely on a model that features Borrowers and Savers and allows for over-borrowing induced by news-shock-driven cycles. We find that policy that responds to changes in financial variables is socially optimal. Considering the use of a single policy instrument, both types of agents are better off when the interest rate optimally responds to credit growth. When we allow for the implementation of both interest-rate and LTV policies, heterogeneity in the welfare implications is key in determining the optimal use of policy instruments. The optimal policy for the Borrowers is characterized by a LTV ratio that responds countercyclically to credit growth, which most effectively stabilizes credit relative to GDP. In contrast, the optimal policy for the Savers features a constant LTV ratio coupled with an interest-rate response to credit growth. News-shock-driven cycles account for most of the gains from a policy response to changes in financial variables.

Keywords: Expectation-driven cycles; Macro-prudential policy; Monetary policy; Welfare analysis (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (183)

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Related works:
Working Paper: Leaning Against Boom-Bust Cycles in Credit and Housing Prices (2011)
Working Paper: Leaning Against Boom-Bust Cycles in Credit and Housing Prices (2011)
Working Paper: Leaning Against Boom-Bust Cycles in Credit and Housing Prices (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:8:p:1500-1522

DOI: 10.1016/j.jedc.2013.03.008

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