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Financial Intermediation, the Mortgage Market, and Macroprudential Regulation

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  • Jenny Körner

Abstract

This article analyzes the effects of macroprudential regulation in a dynamic stochastic general equilibrium model (DSGE) model with a mortgage market where banks and borrowers are subject to a leverage constraint. I evaluate the economic impact of (i) a countercyclical non-risk-adjusted bank capital (BC) requirement ratio, (ii) a countercyclical loan-to-value ratio (LTV), and (iii) both rules during economic and financial downturns. The model simulations show two main results. First, the LTV-rule mitigates the volatility of credit more effectively than the BC regulation because the relaxed collateral limit on the LTV ratio stimulates credit demand. The inverse relation of leverage definitions accounts for the stronger de-amplification stemming from countercyclical leverage constraints of borrowers. Second, if the financial shock affects the macroeconomy exclusively over the private mortgage market, neither of both rules attenuates the negative output effect, since borrowers and savers consumption effects cancel out. These results reveal that countercyclical regulation of borrowers represents an important complement to BC-regulation for safeguarding financial stability.

Suggested Citation

  • Jenny Körner, 2018. "Financial Intermediation, the Mortgage Market, and Macroprudential Regulation," CESifo Economic Studies, CESifo Group, vol. 64(1), pages 50-77.
    • Handle: RePEc:oup:cesifo:v:64:y:2018:i:1:p:50-77.
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    File URL: http://hdl.handle.net/10.1093/cesifo/ify005
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    References listed on IDEAS

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    More about this item

    Keywords

    macroprudential policy; countercyclical collateral constraint; mortgage market; financial regulation;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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