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On the (in)effectiveness of LTV regulation in a multiconstraint framework

Anna Grodecka-Messi

No 10529, EcoMod2017 from EcoMod

Abstract: Models in the macro-housing literature often assume that borrowers are constrained exclusively by the loan-to-value (LTV) ratio. I explore an alternative arrangement where borrowers are constrained by the feasibility of repayment, but choose a house of maximum permissible size conditional on the LTV restriction. This assumption, which is arguably more consistent with mortgage lending practices in countries with multiple borrowing constraints, yields results that disagree with much of the existing literature. In particular, I find that policy designed to lower the maximum permissible LTV ratio may actually increase house prices in equilibrium and leave the debt-to-GDP ratio unchanged. I use the DSGE model to study the macroprudential policies in a multiconstrained framework. The proposed model will change some of the conclusions about the effectiveness of macroprudential policies in countries like Sweden, where borrowers face multiple borrowing constraints at the same time.

Keywords: Sweden; General equilibrium modeling (CGE); Finance (search for similar items in EconPapers)
Date: 2017-07-04
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