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Housing Market Dynamics and Macroprudential Policy

Gabriel Bruneau (), Ian Christensen () and Cesaire Meh ()

Staff Working Papers from Bank of Canada

Abstract: We perform an analysis to determine how well the introduction of a countercyclical loanto- value (LTV) ratio can reduce household indebtedness and housing price fluctuations compared with a monetary policy rule augmented with house price inflation. To this end, we construct a New Keynesian model in which a fraction of households borrow against the value of their houses and we introduce news shocks on housing demand. We estimate the model with Canadian data using Bayesian methods. We find that the introduction of news shocks can generate a housing market boom-bust cycle, the bust following unrealized expectations on housing demand. Our study also suggests that a countercyclical LTV ratio is a useful policy to reduce the spillover from the housing market to consumption, and to lean against news-driven boom-bust cycles in housing price and credit generated by expectations of future macroeconomic developments.

Keywords: Business fluctuations and cycles; Financial stability; Housing; Monetary policy framework; Transmission of monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E42 H23 (search for similar items in EconPapers)
Pages: 86 pages
Date: 2016
New Economics Papers: this item is included in nep-cse, nep-dge, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:16-31

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