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The effectiveness of the counter-cyclical loan-to-value regulation: Generic versus sector-specific rules

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  • Liu, Guangling
  • Molise, Thabang

Abstract

This paper considers the implications of the counter-cyclical loan-to-value (CcLTV) regulation in a setting where different types of borrowers from distinct sectors of the credit market co-exist. We consider two macro-prudential policy regimes, namely generic and sector-specific. We find that both regimes are more effective than the baseline regime (constant LTV ratios) in stabilising macroeconomic and financial stability, and welfare enhancing. Compared to the generic regime, the sector-specific regime delivers a higher degree of macroeconomic and financial stability. For both regimes there is a clear tradeoff between financial and macroeconomic stability, as the authority adjusts its preference between the two policy objectives. To enhance the effectiveness of the CcLTV regulation, we argue that the regulator should consider borrowers’ heterogeneity, and tailor the regulation according to the specific conditions of each sector of the credit market, rather than to the aggregate credit conditions.

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  • Liu, Guangling & Molise, Thabang, 2021. "The effectiveness of the counter-cyclical loan-to-value regulation: Generic versus sector-specific rules," International Review of Economics & Finance, Elsevier, vol. 72(C), pages 270-288.
    • Handle: RePEc:eee:reveco:v:72:y:2021:i:c:p:270-288
    DOI: 10.1016/j.iref.2020.12.002
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    Cited by:

    1. Tarne, Ruben & Bezemer, Dirk & Theobald, Thomas, 2022. "The effect of borrower-specific loan-to-value policies on household debt, wealth inequality and consumption volatility: An agent-based analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).

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    More about this item

    Keywords

    Macro-prudential policy; Counter-cyclical LTV regulation; DSGE; Financial stability; Welfare; Household credit; Corporate credit;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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