Greening the Credit Constraint: Optimal Loan-to-Value Rules under Pollution Externalities

Yohann Berthelin () and Lise Clain-Chamosset-Yvrard ()
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Yohann Berthelin: Université Lumière Lyon 2, CNRS, Université Jean-Monnet Saint-Etienne, emlyon business school, GATE, 69007, Lyon, France
Lise Clain-Chamosset-Yvrard: Université Lumière Lyon 2, CNRS, Université Jean-Monnet Saint-Etienne, emlyon business school, GATE, 69007, Lyon, France

No 2608, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Etienne (GATE Lyon St-Etienne), Université de Lyon

Abstract: We address the question of whether macroprudential policy can extend its mandate beyond correcting financial frictions to also internalizing environmental externalities. We analyze a dynamic general equilibrium model with two externalities: financial frictions and pollution from using brown capital. Our model features heterogeneous agents with infinite lifetimes, of two kinds of capital, polluting and non-polluting, and of a macroprudential policy represented by differentiated loan-to-value (LTV) through a credit constraint faced by entrepreneurs. First, we derive closed-form expressions for optimal differentiated LTV ratios that replicate the social planner’s allocation. Second, the green LTV internalizes financial frictions only, while the brown LTV additionally accounts for pollution externalities, which can turn negative when environmental costs are sufficiently high, indicating that the first-best allocation instead requires a tax-like penalty on the financing of dirty capital rather than a conventional non-negative loan-to-value ratio. Third, the LTV associated with polluting capital becomes more stringent when environmental quality directly affects agents’ utility rather than total factor productivity.

Keywords: Environmental policy; Macroprudential policy; Environmental transition (search for similar items in EconPapers)
JEL-codes: E32 Q50 Q58 (search for similar items in EconPapers)
Date: 2026
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