State-Dependent Effects of Loan-to-Value Shocks

Vivek Sharma

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper presents a Two-Agent New Keynesian (TANK) model with collateral- constrained borrowers and a time-varying shock to loan-to-value (LTV) ratios. A temporary tightening in lending standards in this model leads to a sizable drop in macroeconomic aggregates and significant macroeconomic fluctuations. The analysis shows that effects of shocks to LTV ratios are highly non-linear and state-dependent in the sense that amplification of shocks depends crucially on steady-state LTV ratios. Shocks when LTV ratios are already high lead to effects which are substantially stronger than when the steady-state LTV ratios are comparatively lower. The results in this paper also show that permanent LTV shocks lead to permanent decline in housing prices – a 10 percentage point decline in steady-state LTV ratio from 0.95 results in more than 0.3% decline in housing prices. A novel finding in this paper is that a permanent tightening in lending standards leads to a permanent decline in wages. Additionally, other shocks such as TFP shocks, housing demand shocks and labor supply shocks also show clear state dependence and have highly persistent effects.

Keywords: Loan-to-Value (LTV) Shocks; Housing Price; Macroeconomic Fluctuations (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2023-11
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg, nep-mac and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2023-58

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