The Real Effects of Loan-To-Value Limits: Empirical Evidence from Korea

Victor Pontines

Working Papers from South East Asian Central Banks (SEACEN) Research and Training Centre

Abstract: This study adds to a recent and growing literature that assess the effects of macroprudential policy. We compare the effects of monetary policy and loan-to-value ratio shocks for Korea, an inflation targeting economy and an active user of loan-to-value limits. We identify shocks using sign-restricted structural VARs and rely on a recent approach within this method to conduct structural inference. This study finds that both monetary policy and loan-to-value ratio shocks have effects on different measures of credit, i.e., real bank credit, real total credit and real household credit. We also find that both shocks have non-negligible effects on real house prices, including effects on real output, real consumption and real investment. We do, however, find that loan-to-value ratio shocks have negligible effects on the price level. These findings indicate that for the period covered by this study, limits on loan-to-value achieved its financial stability objectives in Korea in terms of limiting credit and house price appreciation under an inflation targeting regime. Furthermore, it attained these objectives without posing any threat to its price stability objective. Overall, these findings suggest that limits on loan-to-value have important aggregate consequences despite it being a sectoral, targeted policy instrument.

Keywords: Macroprudential Policy; Limits on Loan-to-Value; Monetary Policy; Sign Restrictions; Impulse Response; Forecast Error Variance Decomposition (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 E58 G28 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2019-12
New Economics Papers: this item is included in nep-mac and nep-mon
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https://www.seacen.org/publications/RePEc/702001-100463-PDF.pdf (application/pdf)

Related works:
Journal Article: The real effects of loan-to-value limits: empirical evidence from Korea (2021)
Working Paper: The real effects of loan-to-value limits: Empirical evidence from Korea (2020)
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