LTV regulation and housing bubbles

Claire Chevallier and Sarah El Joueidi

DEM Discussion Paper Series from Department of Economics at the University of Luxembourg

Abstract: This paper develops a dynamic general equilibrium model in innite ho- rizon, with an endogenous banking sector, market sensitive regulatory con- straints, and in which deterministic rational housing bubbles may emerge. We are interested in the conditions under which housing bubbles may emerge and their impact on the economy. We show that 1) when agents face a LTV regulation, two dierent equilibria may emerge and coexist: a bubbleless and a housing bubble equilibria; 2) housing bubbles increase banks' size; 3) when banks face operational costs, housing bubbles reduce welfare. In an extension of the model we introduce a stochastic banking bubble and show that the combination of two market sensitive macroprudential regu- lations, LTV and VaR regulations, allows housing and banking bubbles to arise simultaneously. Their interaction amplies banks' balance sheet size. The welfare impact is positive.

Keywords: "Banking bubble; Dynamic general equilibrium; Housing bubbles; Innitely lived agents; Loan-to-Value; Market sensitive regulations." (search for similar items in EconPapers)
JEL-codes: E44 E60 G1 G21 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:22-09

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