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Mortgage Credit: Lending and Borrowing Constraints in a DSGE Model

Elmer Sánchez León
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Elmer Sánchez León: Banco Central de Reserva del Perú

No 125, Working Papers from Peruvian Economic Association

Abstract: This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model that evaluates the relative importance of the easing of lending and borrowing constraints in mortgage credit markets for business cycle fluctuations in a small open emerging economy. Credit markets are characterized by partial dollarization and are subject to demand shocks, innovations to stochastic loan-to-value ratios (borrowing constraints) imposed on borrowers, and supply shocks, innovations to stochastic bank capital-to-asset ratios (lending constraints) imposed on financial intermediaries. In addition, the model features a set of real and nominal domestic shocks to demand, productivity, and fiscal and monetary policy, as well as foreign shocks. A historical decomposition conducted on household leverage ratios reveals that these variables’ cyclical dynamics were mainly driven by borrowing constraint shocks or credit demand shifts, while lending constraint shocks played a residual role.

Keywords: Financial frictions; DSGE model; banking sector (search for similar items in EconPapers)
JEL-codes: E37 E44 E52 (search for similar items in EconPapers)
Date: 2018-07
New Economics Papers: this item is included in nep-dge and nep-mac
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