Household Debt and Borrower-Based Measures in Finland: Insights from a Heterogeneous Agent Model

Fumitaka Nakamura

No 2023/262, IMF Working Papers from International Monetary Fund

Abstract: We analyze the effects of borrower-based macroprudential tools in Finland. To evaluate the efficiency of the tools, we construct a heterogeneous agent model in which households endogenously determine their housing size and liquid asset levels under two types of borrowing constraints: (i) a loan-to-value (LTV) limit and (ii) a debt-to-income (DTI) limit. When an unexpected negative income shock hits the economy, we find that a larger and more persistent drop in consumption is observed under the LTV limit compared to the DTI limit. Our results indicate that although DTI caps tend to be unpopular with lower income households because they limit the amount they can borrow, DTI caps are beneficial even on distributional grounds in stabilizing consumption. Specifically, DTI caps mitigate the consumption decline in recessions by restricting high leverage, and thus, they can usefully complement LTV caps.

Keywords: Household indebtedness; loan-to-value ratio; debt-to-income ratio; macroprudential policy.; DTI cap; household debt; DTI limit; consumption transition; measures in Finland; Consumption; Income; Housing; Macroprudential policy instruments; Macroprudential policy; Global; Baltics (search for similar items in EconPapers)
Pages: 22
Date: 2023-12-15
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-eur, nep-hme and nep-ure
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