Return to search

House prices, capital inflows and macroprudential policy

This paper evaluates the monetary and macroprudential policies that mitigate the procyclicality arising
from the interlinkages between current account deficits and financial vulnerabilities. We develop a two-country dynamic stochastic general equilibrium (DSGE) model with heterogeneous households and collateralised debt. The model predicts that external shocks are important in driving current account deficits that are coupled with run-ups in house prices and household debt. In this context, optimal policy features an interest-rate response to credit and a LTV ratio that countercyclically responds to house price
dynamics. By allowing an interest-rate response to changes in financial variables, the monetary policy authority improves social welfare, because of the large welfare gains accrued to the Savers. The additional use of a countercyclical LTV ratio that responds to house prices, increases the ability of borrowers to smooth consumption over the cycle and is Pareto improving. Domestic and foreign shocks account for a similar fraction of the welfare gains delivered by such a policy. (authors' abstract)

Identiferoai:union.ndltd.org:VIENNA/oai:epub.wu-wien.ac.at:4293
Date12 1900
CreatorsMendicino, Caterina, Punzi, Maria Teresa
PublisherElsevier
Source SetsWirtschaftsuniversität Wien
LanguageEnglish
Detected LanguageEnglish
TypeArticle, PeerReviewed, info:eu-repo/semantics/article
Formatapplication/pdf
RightsCreative Commons: Attribution-Noncommercial-No Derivative Works 3.0 Austria, info:eu-repo/semantics/openAccess
Relationhttp://dx.doi.org/10.1016/j.jbankfin.2014.06.007, http://www.journals.elsevier.com/journal-of-banking-and-finance, https://www.elsevier.com/journals/journal-of-banking-and-finance/0378-4266/open-access-options, http://cordis.europa.eu/project/rcn/111392_en.html, http://epub.wu.ac.at/4293/, info:eu-repo/grantAgreement/EC/FP7/612955/EU/Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents/FINMAP

Page generated in 0.0019 seconds