Taming the housing crisis: An LTV macroprudential policy

Robert Forster and Xiaojin Sun

Economic Modelling, 2022, vol. 108, issue C

Abstract: This paper develops a DSGE framework featuring heterogeneous housing markets, endogenous mortgage defaults, and a banking sector. We find that the idiosyncratic mortgage risk shock plays an important role in explaining the fluctuations of house prices during the 1980s and the years leading up to the financial crisis. The same shock is also an important driving force of household loans. By placing an occasionally binding constraint on the loan-to-value ratio via a counterfactual analysis, we find that the overheating of the housing economy in the early 2000s and the subsequent crash could have been alleviated, if authorities had adopted such a macroprudential policy measure. A comparison of utility gains suggests that such a maximum loan-to-value ratio policy is preferable over an augmented Taylor rule that responds to house price growth.

Keywords: DSGE Model; Endogenous default; Housing; Macroprudential policy; Loan-to-Value (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 G21 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:108:y:2022:i:c:s0264999322000074

DOI: 10.1016/j.econmod.2022.105761

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