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Assessing the Impact of Monetary and Macroprudential Policies on Israel's Housing Market: A DSGE Model Approach

Author

Listed:
  • Alex Ilek

    (Bank of Israel)

  • Nimrod Cohen

    (Bank of Israel)

  • Yaakov Chen-Zion

    (Bank of Israel)

Abstract

We develop and calibrate a micro-founded DSGE model, tailored to the Israeli economy, based on key stylized facts about the Israeli economy. The model includes the housing market, both ownership and rental, and heterogeneous households. Macroprudential policy is represented by policy regarding the Loan-to-Value (LTV) ratio, a common measure in both literature and practice. Our primary objective is to examine the effects of monetary and macroprudential policies on the housing market, especially on housing prices. Our findings suggest that contractionary monetary policy pushes home prices downward while real rent prices rise. Macroprudential policy does not undermine monetary policy’s ability to achieve its primary goals, although it introduces a slight distributional effect. Tighter macroprudential policy (lower LTV) significantly reduces debt and the ownership-to-rent ratio in the economy, but slightly increases home prices and real rent prices. This challenges the existing DSGE model literature, and we attribute this discrepancy to the absence of a rental market (and real estate investors) in those models. These insights indicate that while macroprudential tools can help manage financial stability, their effect on home prices must be carefully assessed alongside other monetary measures.

Suggested Citation

  • Alex Ilek & Nimrod Cohen & Yaakov Chen-Zion, 2024. "Assessing the Impact of Monetary and Macroprudential Policies on Israel's Housing Market: A DSGE Model Approach," Bank of Israel Working Papers 2024.14, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2024.14
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    housing market; monetary policy; macroprudential policy; ownership-to-rent ratio; heterogeneous households;
    All these keywords.

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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