The macroprudential toolkit: effectiveness and interactions
Stephen Millard (),
Margarita Rubio () and
Alexandra Varadi ()
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Stephen Millard: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Alexandra Varadi: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
No 902, Bank of England working papers from Bank of England
We use a DSGE model with financial frictions, leverage limits on banks, loan to value (LTV) limits and debt‑service ratio (DSR) limits on mortgage borrowing to examine: i) the effects of different macroprudential policies on key macro aggregates; ii) their interaction with each other and with monetary policy; and iii) their effects on the volatility of key macroeconomic variables and on welfare. We find that capital requirements can nullify the effects of financial frictions and reduce the effects of shocks emanating from the financial sector on the real economy. LTV limits, on their own, are not sufficient to constrain household indebtedness in booms, though can be used with capital requirements to keep DSRs under control. Finally, DSR limits lead to a significant decrease in the volatility of lending, consumption and inflation, since they disconnect the housing market from the real economy. Overall, DSR limits are welfare improving relative to any other macroprudential tool.
Keywords: Macroprudential policy; monetary policy; leverage ratio; affordability constraint; collateral constraint (search for similar items in EconPapers)
JEL-codes: E44 E58 G21 G28 (search for similar items in EconPapers)
Pages: 49 pages
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fdg, nep-mac, nep-mon and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0902
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