The Macroeconomic Effects of Macroprudential Policy

Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 18/2018

Journal of International Economics,Volume 118, May 2019, Pages 263-282. New title: "The costs of macroprudential policy"

48 Pages Posted: 4 Sep 2018 Last revised: 12 Aug 2022

Multiple version iconThere are 2 versions of this paper

Date Written: August 17, 2018

Abstract

This working paper was written by Bjorn Richter (University of Bonn), Moritz Schularick (University of Bonn and CEPR) and Ilhyock Shim (Bank for International Settlements).

Central banks increasingly rely on macroprudential measures to manage the financial cycle. However, the effects of such policies on the core objectives of monetary policy to stabilise output and inflation are largely unknown. In this paper we quantify the effects of changes in maximum loan-to-value (LTV) ratios on output and inflation. We rely on a narrative identification approach based on detailed reading of policy-makers’ objectives when implementing the measures. We find that over a four year horizon, a 10 percentage point decrease in the maximum LTV ratio leads to a 1.1% reduction in output. As a rule of thumb, the impact of a 10 percentage point LTV tightening can be viewed as roughly comparable to that of a 25 basis point increase in the policy rate. However, the effects are imprecisely estimated and the effect is only present in emerging market economies. We also find that tightening LTV limits has larger economic effects than loosening them. At the same time, we show that changes in maximum LTV ratios have substantial effects on credit and house price growth. Using inverse propensity weights to rerandomise LTV actions, we show that these effects are likely causal.

Keywords: macroprudential policy, loan-to-value ratios, local projections, narrative approach

JEL Classification: E58, G28

Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, The Macroeconomic Effects of Macroprudential Policy (August 17, 2018). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 18/2018, Journal of International Economics,Volume 118, May 2019, Pages 263-282. New title: "The costs of macroprudential policy", Available at SSRN: https://ssrn.com/abstract=3233330 or http://dx.doi.org/10.2139/ssrn.3233330

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