Heterogeneity and Asymmetric Macroeconomic Effects of Changes in Loan-to-Value Limits

66 Pages Posted: 15 May 2019

Date Written: May 13, 2019

Abstract

We estimate the macroeconomic effects of changes in loan-to-value limits using an approach that involves the cross-sectional loan-to-value distribution and does not require that a limit is actually in place. We show that the effects are asymmetric and non-linear as tighter limits constrain a larger fraction of borrowers. Symmetry is a good approximation when the limit is tight but not at other points. We find that an increase in heterogeneity can substantially increase the effects of a change in loan-to-value caps. We document that if one abstracts from borrower heterogeneity, one understates the size of the effects of LTV limits when the limit lies above the average LTV.

Keywords: credit constraints, macroprudential policy, loan-to-value ratio

JEL Classification: C32, E21, E32, E44

Suggested Citation

de Jong, Jasper and de Veirman, Emmanuel, Heterogeneity and Asymmetric Macroeconomic Effects of Changes in Loan-to-Value Limits (May 13, 2019). De Nederlandsche Bank Working Paper No. 635 (2019), Available at SSRN: https://ssrn.com/abstract=3388199 or http://dx.doi.org/10.2139/ssrn.3388199

Jasper de Jong

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Emmanuel De Veirman (Contact Author)

De Nederlandsche Bank ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

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