The Costs of Macroprudential Policy

Björn Richter, Moritz Schularick and Ilhyock Shim

No 24989, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Central banks increasingly rely on macroprudential measures to manage the financial cycle. However, the effects of such policies on the core objectives of monetary policy to stabilise output and inflation are largely unknown. In this paper, we quantify the effects of changes in maximum loan-to-value (LTV) ratios on output and inflation. We rely on a narrative identification approach based on detailed reading of policy-makers’ objectives when implementing the measures. We find that over a four year horizon, a 10 percentage point decrease in the maximum LTV ratio leads to a 1.1% reduction in output. As a rule of thumb, the impact of a 10 percentage point LTV tightening can be viewed as roughly comparable to that of a 25 basis point increase in the policy rate. However, the effects are imprecisely estimated and the effect is only present in emerging market economies. We also find that tightening LTV limits has larger economic effects than loosening them. At the same time, we show that changes in maximum LTV ratios have substantial effects on credit and house price growth. Using inverse propensity weights to rerandomise LTV actions, we show that these effects are likely causal.

JEL-codes: E58 G28 (search for similar items in EconPapers)
Date: 2018-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG IFM ME
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Citations: View citations in EconPapers (15)

Published as The Costs of Macroprudential Policy , Björn Richter, Moritz Schularick, Ilhyock Shim. in NBER International Seminar on Macroeconomics 2018 , Galí and West. 2019
Published as Björn Richter & Moritz Schularick & Ilhyock Shim, 2019. "The costs of macroprudential policy," Journal of International Economics, .

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Journal Article: The costs of macroprudential policy (2019)
Chapter: The Costs of Macroprudential Policy (2018)
Working Paper: The Costs of Macroprudential Policy (2018)
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