Household Debt, Macroprudential Rules, and Monetary Policy

Nurlan Turdaliev () and Yahong Zhang
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Nurlan Turdaliev: Department of Economics, University of Windsor

No 1704, Working Papers from University of Windsor, Department of Economics

Abstract: Today's Canadian economy features a historic high of household debt and persistently low growth rate. The average debt-to-GDP ratio has reached the level experienced in the U.S. just prior to the recent financial crisis. Should monetary policy lean against the household indebtedness or are macroprudential policies better suited for the task? To provide a quantitative answer, this paper develops a small open economy dynamic stochastic general equilibrium model featuring a banking sector that channels funds between household savers and borrowers. We estimate the model using the Canadian data from 1991Q1 to 2015Q3 and conduct policy experiments. We find that using monetary policy that reacts to household indebtedness increases inflation volatility and lowers borrowers' welfare, while using macroprudential policies such as lowering the loan-to-value ratio limit increases borrowers' welfare.

Keywords: household debt; macroprudential rules; monetary policy (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2017-05, Revised 2017-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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http://web2.uwindsor.ca/economics/RePEc/wis/pdf/1704.pdf First version, 2017 (application/pdf)

Related works:
Journal Article: Household debt, macroprudential rules, and monetary policy (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:wis:wpaper:1704

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