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Household Debt, Macroprudential Rules, and Monetary Policy

Author

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  • Nurlan Turdaliev

    (Department of Economics, University of Windsor)

  • Yahong Zhang

    (Department of Economics, University of Windsor)

Abstract

Today's Canadian economy features a historic high of household debt and persistently low growth rate. The average debt-to-GDP ratio has reached the level experienced in the U.S. just prior to the recent financial crisis. Should monetary policy lean against the household indebtedness or are macroprudential policies better suited for the task? To provide a quantitative answer, this paper develops a small open economy dynamic stochastic general equilibrium model featuring a banking sector that channels funds between household savers and borrowers. We estimate the model using the Canadian data from 1991Q1 to 2015Q3 and conduct policy experiments. We find that using monetary policy that reacts to household indebtedness increases inflation volatility and lowers borrowers' welfare, while using macroprudential policies such as lowering the loan-to-value ratio limit increases borrowers' welfare.

Suggested Citation

  • Nurlan Turdaliev & Yahong Zhang, 2017. "Household Debt, Macroprudential Rules, and Monetary Policy," Working Papers 1704, University of Windsor, Department of Economics, revised May 2017.
    • Handle: RePEc:wis:wpaper:1704
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    References listed on IDEAS

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    3. Kaelo Mpho Ntwaepelo, 2021. "The Effects of Macroprudential and Monetary Policy Shocks in BRICS economies," Economics Discussion Papers em-dp2021-20, Department of Economics, University of Reading.

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    More about this item

    Keywords

    household debt; macroprudential rules; monetary policy;
    All these keywords.

    JEL classification:

    • 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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