Assessing the impact of macroprudential measures: The case of the LTV limit in Lithuania

Tomas Reichenbachas ()
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Tomas Reichenbachas: Bank of Lithuania

No 80, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: In this paper, we adopt a dual micro-and-macro simulation strategy to assess the impact of introducing (or changing) the LTV limit. Due to the nature of borrower-based macroprudential measures, to assess this impact we need to use borrower-level micro data. Tightening (or loosening) the LTV limit increases the share of borrowers constrained by the policy measure in question; thus, the overall impact depends on initial market conditions. We find that the introduction of an LTV limit of 85 % in 2011 had a modest short-term impact on economic activity because the new regulatory limit was non-binding for most borrowers at the time. We estimate that if the LTV limit would not have been introduced, the household loan portfolio would have grown on average 1.5 percentage points faster per year (over 2012-2014). This would have led to a 0.5 percentage point higher housing price growth and a 0.2 percentage point higher real GDP growth. When the macroprudential LTV limit is binding for a significant portion of borrowers, lowering the LTV limit at current market conditions has a much more pronounced effect. We show that if the LTV limit had been implemented at the end of 2004, it would have substantially helped in tempering the credit and housing boom, albeit at the cost of lowering economic growth.

Keywords: Financial stability; Macroprudential policy; Borrower-based macroprudential policy instruments; LTV limit (search for similar items in EconPapers)
JEL-codes: C32 C53 E58 G28 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2020-12-02
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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