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Mortgage Credit: Lending and Borrowing Constraints in a DSGE Model

Author

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  • Elmer Sánchez León

    (Banco Central de Reserva del Perú)

Abstract

This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model that evaluates the relative importance of the easing of lending and borrowing constraints in mortgage credit markets for business cycle fluctuations in a small open emerging economy. Credit markets are characterized by partial dollarization and are subject to demand shocks, innovations to stochastic loan-to-value ratios (borrowing constraints) imposed on borrowers, and supply shocks, innovations to stochastic bank capital-to-asset ratios (lending constraints) imposed on financial intermediaries. In addition, the model features a set of real and nominal domestic shocks to demand, productivity, and fiscal and monetary policy, as well as foreign shocks. A historical decomposition conducted on household leverage ratios reveals that these variables’ cyclical dynamics were mainly driven by borrowing constraint shocks or credit demand shifts, while lending constraint shocks played a residual role.

Suggested Citation

  • Elmer Sánchez León, 2018. "Mortgage Credit: Lending and Borrowing Constraints in a DSGE Model," Working Papers 125, Peruvian Economic Association.
    • Handle: RePEc:apc:wpaper:125
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    More about this item

    Keywords

    Financial frictions; DSGE model; banking sector;
    All these keywords.

    JEL classification:

    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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