House Price Dynamics, Optimal LTV Limits and the Liquidity Trap

Andrea Ferrero, Richard Harrison and Benjamin Nelson

The Review of Economic Studies, 2024, vol. 91, issue 2, 940-971

Abstract: This paper studies the optimal design of a macro-prudential instrument, a loan-to-value (LTV) limit, and its implications for monetary policy in a model with nominal rigidities and financial frictions. The analysis accounts for both an effective lower bound on the nominal interest rate and an upper bound on the ability of LTV limits to stimulate credit demand. The welfare-based loss function features a role for macro-prudential policy to enhance risk-sharing. Optimal LTV limits are strongly countercyclical. In a house price boom-bust episode, the active use of LTV limits alleviates debt-deleveraging dynamics and prevents the economy from falling into a liquidity trap.

Keywords: Monetary and macro-prudential policy; Financial crisis; Zero lower bound (search for similar items in EconPapers)
Date: 2024
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Related works:
Working Paper: House price dynamics, optimal LTV limits and the liquidity trap (2022)
Working Paper: House Price Dynamics, Optimal LTV Limits and the Liquidity Trap (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:91:y:2024:i:2:p:940-971.

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