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Systematic Monetary Policy and the Macroeconomic Effects of Shifts in Loan-to-Value Ratios

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  • Bachmann, Rüdiger
  • Rueth, Sebastian

Abstract

What are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets, as measured by loan-to-value (LTV) ratios? In a structural VAR, GDP and business investment increase following an expansionary LTV shock. Residential investment, by contrast, falls, a result that depends on the systematic reaction of monetary policy. We show that, historically, the Fed tended to respond directly to expansionary LTV shocks by raising the monetary policy instrument, and, as a result, mortgage rates increase and residential investment declines. The monetary policy reaction function in the US appears to include lending standards in residential markets, a finding we confirm in Taylor rule estimations. Without the endogenous monetary policy reaction residential investment increases. House prices and household (mortgage) debt behave in a similar way. This suggests that an exogenous loosening of LTV ratios is unlikely to explain booms in residential investment and house prices, or run ups in household leverage, at least in times of conventional monetary policy.

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  • Bachmann, Rüdiger & Rueth, Sebastian, 2017. "Systematic Monetary Policy and the Macroeconomic Effects of Shifts in Loan-to-Value Ratios," CEPR Discussion Papers 12024, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12024
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    6. Björn Richter & Moritz Schularick & Ilhyock Shim, 2018. "The macroeconomic effects of macroprudential policy," BIS Working Papers 740, Bank for International Settlements.
    7. Shuffield Seyram Asafo & Michal Moszynski, 2022. "The combined effects of monetary and macroprudential policies," SN Business & Economics, Springer, vol. 2(9), pages 1-20, September.

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    More about this item

    Keywords

    Loan-to-value ratios; Monetary policy; Residential investment; Structural var; Cholesky identification; Taylor rules;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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