The Conduct of LTV Policy under Inflationary Shocks

Margarita Rubio and Fang Yao
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Margarita Rubio: University of Nottingham
Fang Yao: Central Bank of Ireland

No 1/RT/25, Research Technical Papers from Central Bank of Ireland

Abstract: This paper examines loan-to-value (LTV) policy as a macroprudential tool and its interactions with monetary policy in an inflationary environment. The combination of inflation shocks and collateral constraints introduces additional trade-offs for policymakers, emphasizing the need for coordination between macroprudential and monetary policies. Using a DSGE model with collateral constraints, we evaluate the implications of an optimized LTV rule for a welfare-based loss function that incorporates economic and financial stability. Our core finding indicates that, under inflation shocks, policy coordination reduces welfare-based losses compared to a non-coordination regime. In particular, the LTV rule is active (responding to cyclical factors, e.g. house prices) when monetary policy responds weakly to inflation shocks, but the LTV rule becomes passive (only responding to structural factors) when monetary policy chooses to be hawkish towards inflation.

Keywords: LTV policy; Monetary Policy; macroprudential policy coordination; collateral constraints; financial friction; cost-push shocks. (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 (search for similar items in EconPapers)
Date: 2025-02
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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