House price dynamics, optimal LTV limits and the liquidity trap
Andrea Ferrero (),
Richard Harrison () and
Benjamin Nelson ()
Additional contact information
Andrea Ferrero: University of Oxford
Benjamin Nelson: RCM
No 969, Bank of England working papers from Bank of England
The global financial crisis prompted the rapid development of macro-prudential frameworks and an increased reliance on borrower-based policy tools, which influence the demand for credit. This paper studies the optimal design of one such tool, a loan-to-value (LTV) limit, and its implications for monetary policy in a model with nominal rigidities and financial frictions. 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)
JEL-codes: E52 E58 G01 G28 (search for similar items in EconPapers)
Pages: 72 pages
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac, nep-mon and nep-ure
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Working Paper: House Price Dynamics, Optimal LTV Limits and the Liquidity Trap (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0969
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