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Taming the housing crisis: An LTV macroprudential policy

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  • Forster, Robert
  • Sun, Xiaojin

Abstract

This paper develops a DSGE framework featuring heterogeneous housing markets, endogenous mortgage defaults, and a banking sector. We find that the idiosyncratic mortgage risk shock plays an important role in explaining the fluctuations of house prices during the 1980s and the years leading up to the financial crisis. The same shock is also an important driving force of household loans. By placing an occasionally binding constraint on the loan-to-value ratio via a counterfactual analysis, we find that the overheating of the housing economy in the early 2000s and the subsequent crash could have been alleviated, if authorities had adopted such a macroprudential policy measure. A comparison of utility gains suggests that such a maximum loan-to-value ratio policy is preferable over an augmented Taylor rule that responds to house price growth.

Suggested Citation

  • Forster, Robert & Sun, Xiaojin, 2022. "Taming the housing crisis: An LTV macroprudential policy," Economic Modelling, Elsevier, vol. 108(C).
    • Handle: RePEc:eee:ecmode:v:108:y:2022:i:c:s0264999322000074
    DOI: 10.1016/j.econmod.2022.105761
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    2. Evangelia Avgeri & Maria Psillaki & Evanthia Zervoudi, 2023. "Peer-to-Peer Lending as a Determinant of Federal Housing Administration-Insured Mortgages to Meet Sustainable Development Goals," Sustainability, MDPI, vol. 15(18), pages 1-30, September.

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    More about this item

    Keywords

    DSGE Model; Endogenous default; Housing; Macroprudential policy; Loan-to-Value;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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