MEDSEA-FIN A DSGE model of the Maltese economy with housing and financial frictions

William Gatt, Noel Rapa and Luca Brugnolini

No WP/04/2020, CBM Working Papers from Central Bank of Malta

Abstract: We extend the Central Bank of Malta’s core DSGE model – MEDSEA – with housing and financial frictions to capture the important theoretical links between house prices, credit and consumption. The model features a rich set of features that are inherent to small open economies in a monetary union. We add a borrowing constraint on a subset of households that is contingent on the value of housing wealth and a maximum loan-to-value (LTV) ratio. We also impose capital requirements on the financial intermediary through a minimum capital-to-assets ratio (CAR) constraint. These two requirements form the basis of a typical macroprudential regime in a developed economy. We show how the macroprudential authority can dampen the rise in credit and consumption during a credit boom by using these two policy tools to ‘lean against the wind’. MEDSEA-FIN is therefore tailored to study macro-financial issues related to housing and credit, and the adequate policy responses.

JEL-codes: C54 E44 E58 E60 (search for similar items in EconPapers)
Pages: 35 pgs
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac and nep-ure
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:mlt:wpaper:0420

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