## _021909 ## Source details **Canonical URL:** [_021909](https://www.imf.org/-/media/websites/imf/imported-publications/external/np/pp/eng/2009/_021909.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-publications/external/np/pp/eng/2009/_021909.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-publications/external/np/pp/eng/2009/_021909.pdf.json) --- ### Pre-crisis macro-financial conditions - Productivity growth was high and inflation was stable in most countries, indicating activity growth was roughly consistent with growth in the economy’s potential. - Short-term rates were low, reflecting accommodative monetary policy; long-term rates were also low, reflecting high saving in Asian and oil surplus countries and low saving in the United States. - Low interest rates and limited volatility prompted a search for yield and underestimation of risks, pushing up asset prices (stocks and housing) in the United States, other advanced countries, and emerging markets. - Central bank frameworks: increasing popularity of inflation targeting; some central banks focused nearly exclusively on inflation stabilization, others weighted aggregate activity more explicitly. Few took sufficient account of risks from asset price increases or leverage. ### How benign conditions fed systemic risk - Low rates, together with excessive optimism, contributed to: - rising asset prices across asset classes; - increased risk-taking and creation/purchase of ever riskier assets; - development of off-balance-sheet structures that masked maturity mismatches and liquidity vulnerabilities. - Practical limits of regulation: regulation “did not” stop the build up of huge risks below regulators’ radar, in banks and in the shadow banking system. - Monetary policy limits: monetary policy easing and last-resort lending are showing their limits when financial system solvency is systemically impaired or in serious doubt; sharp decreases in policy rates since the onset of the crisis have not been sufficient to stave off a steep downturn. ### Low rates, global imbalances, and capital flows - Drivers of low long-term rates: high world saving, in particular strong demand for safe assets from Asia (in particular China) and oil exporting countries; strong global preference for U.S. assets (considered less risky and more liquid). - Global imbalances: large U.S. current account deficits matched by large current account surpluses elsewhere; reflected in large capital flows from surplus countries into the United States. - Pre-crisis worry focused on a sudden reversal of capital flows and a disorderly dollar depreciation; instead, the crisis manifested as a sharp fall in confidence in the global financial system and a compression in U.S. aggregate demand driven by the unwinding of the housing boom and curtailed credit flows. - Policy implications regarding capital inflows: - Large inflows can lead to excessive risk taking, exchange rate risk exposure, currency and asset-price appreciations followed by abrupt reversals, and pressure on demand and output. - Monetary policy may work poorly to slow activity in the face of inflows because higher interest rates can make domestic assets more attractive. - Two policy issues: revisit when and how to react to large imbalances through macroeconomic and structural policies affecting saving and investment; consider prudential measures to reduce systemic risk associated with large capital inflows (e.g., constraints on foreign exchange exposure). ### Asset price booms, credit booms, and systemic risk - Key distinction: not all booms end in financial distress; what matters is who holds the assets and how a bust affects financial institutions. - Factors increasing systemic risk: - High leverage associated with funding of the boom; - High involvement of banks and financial intermediaries; - Off-balance-sheet obligations and maturity/currency mismatches; - Widespread foreign-currency lending to unhedged domestic agents. - Examples: dot-com bust had limited bank/credit involvement and resulted in a relatively mild recession; by contrast, booms fueled by bank credit have led to severe crises (Great Depression, Japan 1980s, East Asian crisis, Scandinavian crises). - Lending based on rising collateral values is hazardous: falls in collateral values tighten lending, force distressed asset sales, deteriorate bank capital and liquidity, and can freeze credit supply. - What matters for transmission of shocks is the liability structure of holders of credit risk (maturity mismatch and leverage). ### Empirical patterns of credit booms and crisis incidence - Only a minority, "20 percent", of credit booms (defined as episodes of credit growth above a certain threshold from a historical trend) has ended in a crisis. - The probability of a financial crisis increases significantly with booms: "by between 50 and 75 percent". - Larger size and longer duration of a boom increase crisis likelihood: - Booms that last "more than 7 years" are twice as likely to end up in a crisis. - Credit booms coinciding with higher inflation, fast rising real estate prices, and, to a lesser extent, lower growth and large current account deficits are more likely to end in a crisis. - Empirical early-warning power is limited: the ability of existing empirical models to distinguish “good” from “bad” booms is relatively low. ### Features that amplified the recent crisis - Four elements explaining the severity and global scale: 1. Increased balance-sheet opaqueness and reliance on wholesale funding increased systemic fragility; complexity of instruments undermined price discovery and led to market illiquidity once house prices fell and defaults rose. 2. Increased interconnectedness of financial institutions and markets, more highly correlated financial risks, and the size/centrality of U.S. financial markets intensified cross-market and cross-border spillovers. 3. High degree of leverage across several sectors converted liquidity concerns into solvency worries for many financial institutions; on the borrower side, high loan-to-income and loan-to-value mortgages increased household exposure to shocks and negative equity risk. 4. Prominent role of household indebtedness complicates crisis resolution—moral hazard, large case numbers, equity/distribution issues, and political sensitivities slow and complicate household debt restructuring. - Data context referenced: - For the current U.S. crisis, the beginning date is assumed to be "2007:3". - Household debt series span "1952-2008". ### Policy discussion and directions - Re-examine the role of macroeconomic policy in managing credit and asset price booms: - Monetary policy: stronger case for a framework that incorporates longer-term implications of asset-price booms for inflation and growth. - Regulation and prudential policy: while regulation may be theoretically preferable to monetary intervention, in practice risks accumulated outside regulators’ sight; potential role for countercyclical prudential policies to tame speculative booms (discussed in greater detail in companion paper IMF (2009a)). - Prudential measures to manage capital inflows: e.g., constraints on foreign exchange exposure of domestic financial institutions and other borrowers. - Recognize limits of monetary policy and last-resort lending when solvency is in doubt; policy mixes need to address systemic risk buildup rather than rely solely on ex-post cleanup. ### Credit growth and household leverage - Credit to households rose rapidly after 2000, driven largely by growth in mortgages. - Interest rates below historical averages and financial innovation contributed to the increase in outstanding household debt. - Despite low interest rates, debt service relative to disposable income reached a historical high. - Increased household leverage, coupled with prospects of a depletion of household equity, left households vulnerable to: - declines in house prices, - tightening credit conditions, and - a slowdown in economic activity. - Slower credit expansion to the corporate sector contained aggregate credit growth because corporations had high internal earnings and tapped more capital markets. ### Housing boom dynamics and systemic exposure - House prices peaked six quarters prior to the beginning of the banking crisis, after rising by more than 30 percent in the previous five years. - The housing boom’s overall size and dynamics were remarkably similar to house price developments in the previous five major banking crises (Big 5): Finland, 1991; Japan, 1992; Norway, 1987; Spain, 1977; and Sweden, 1991. - The recent U.S. housing boom was funded through an increase in mortgages originated by banks and non-banks, with a large portion securitized. - Perception in the upswing: risk was passed to investors with longer-term and less-leveraged liability structures. - The surprise in the bust: banks (and highly leveraged broker-dealers) had far larger than anticipated exposures to the housing sector through their SIVs, conduits, and trading books. - Given the liability structure (maturity mismatch and leverage) of these holders of credit risk, the housing downturn became a threat to financial and macroeconomic stability. - Regions with faster mortgage origination growth and sharper house price increases are witnessing greater increases in delinquency rates. - Mechanisms linking credit booms to crises: - increase in leverage of borrowers (and lenders), - decline in lending standards (e.g., significant increase in loan-to-income ratios and a decline in mortgage denial rates) not explained by underlying fundamentals. ### International patterns and capital flows - Credit aggregates grew extremely fast in the United Kingdom, Spain, Iceland, and several Eastern European countries in the run-up to the crisis. - These credit expansions fueled real estate booms across Eastern and Western Europe, including the United Kingdom and Iceland. - Increased household leverage generally supported these housing booms. - For Eastern Europe and some emerging markets, a clear relationship can be documented between credit growth and capital inflows. - Risks were exacerbated in many countries by widespread unhedged foreign-currency borrowing by households. ### Implications for macroeconomic policy — Overview - How assets are held and who is exposed to crashes matters for whether and how policy should respond to a boom. - Asset price booms supported through leveraged financing and involving financial intermediaries should be dealt with because they entail risks for the supply of credit; other booms could more likely be left to themselves. - Monetary policy and procyclical prudential policies can help contain dangerous booms. - Fiscal space to deal with a potential crisis should be built during upswing and tax distortions favoring indebtedness and leverage should be eliminated. ### Monetary policy: when, whether, and how to react - Benign neglect view: central banks should focus on inflation (and growth); asset prices monitored only insofar as they carry information on the economy. - Arguments for stricter monitoring and action: - Narrow focus to episodes involving credit and the banking system makes identification of dangerous booms easier. - Policy actions can be undertaken on a probabilistic basis if inaction may lead to catastrophic scenarios. - Monetary authorities can influence market behavior through statements and analysis. - Useful indicators and horizons: - Ratio of credit to GDP and its growth rate provide warning bells for overall leverage. - Complement with other leverage measures, borrower data, and balance-sheet exposures. - International Investment Position and the capital account provide complementary information in open economies. - Research suggests some variables can predict output and inflation even three to five years out. - Special attention to real estate booms given high borrower leverage. - Need for systemic risk measures: - Develop new measures complementing firm-centric regulatory variables, focusing on system-wide leverage, aggregate foreign exposure, etc. - Monetary policy’s role and limits: - Monetary policy should take into account macro-financial stability, not just price stability. - Under certain conditions, “leaning against the wind” by tightening monetary policy may yield long-term benefits for growth and inflation. - Financial stability need not be an explicit target; instead measures of financial stability or asset-price stability can be integrated into policy frameworks alongside inflation and the output gap. - Monetary policy acts with longer lags on asset prices than typical inflation-targeting horizons. - Monetary policy is a blunt tool: during booms, high expected returns can make marginal interest rate changes ineffective. - Evidence: denial rate for prime mortgage applications correlated with the Federal Funds rate; denial rates in subprime market were uncorrelated with the Federal Funds rate. - Capital account openness limits effectiveness: restrictive monetary policy can decrease domestic-currency lending but increase foreign-currency loans, possibly raising risks. ### Prudential and supervisory policy (monetary policy versus regulation) - Primary burden to curb credit booms should be on flexible prudential and supervision policies that mitigate procyclicality. - Prudential and administrative measures can be more targeted and less costly than interest rate changes. - Examples of recommended prudential actions: - Increase minimum regulatory capital requirements during upswing and lower them in downturns. - Encourage more aggressive provisioning during periods of fast credit growth. - Move beyond firm-level focus to system-wide measures. - Measures to reduce specific risks: - higher capital and provisioning requirements, - more intensive surveillance of potential problem banks, - appropriate disclosure requirements of banks’ risk management policies, - limits on sectoral loan concentration, - tighter eligibility and collateral requirements for certain loan categories, - limits on foreign exchange exposure, - maturity mismatch regulations. - Measures to reduce distortions and incentives for excessive borrowing: - eliminate implicit foreign exchange guarantees, - public risk awareness campaigns. - Financial globalization and regulatory circumvention: - cross-border coordination is required to avoid loopholes (currency substitution, activity switching to offshore centers). - Coordination among host- and home-country regulators and monetary authorities is critical for liquidity and solvency support during busts. ### Fiscal policy: buffers, taxation, and neutrality - Fiscal policy did not play a major proximate role in the run up to the crisis, though large U.S. fiscal deficits were a factor behind global imbalances. - Two lessons from the crisis regarding fiscal policy: - Budget deficits were not reduced sufficiently during boom years when revenues were high, limiting fiscal space to fight the crisis. - The structure of taxation is biased toward debt financing through deductibility of interest payments; this bias increases private sector vulnerability and should be eliminated. - Fiscal policy roles: - Establish fiscal buffers in good times; rules-based frameworks can help. - Fiscal policy can mitigate booms and reduce vulnerability buildup by lowering demand pressures at the aggregate level. - Tax distortions and housing: - Mortgage interest deductibility favors housing borrowing and encourages accumulation of gross housing debt. - One estimate for the United States suggests a tax subsidy to owner occupation of about 19 percent of user costs on average, and around 8 percent for low-income households. - Deductibility of interest payments against corporation tax but not return to equity creates a bias toward debt finance. - Technical solutions exist to reduce these distortions; political difficulties can be overcome (example: United Kingdom phased out mortgage interest relief). - A few countries have adopted corporate tax systems that level the playing field between debt and equity finance. - Tax policy and asset prices: - Tax provisions may affect level, growth, and volatility of asset prices, but ad hoc tax changes are unlikely the best way to control speculative booms. - Financial regulatory measures are likely to be better targeted; neutrality across asset and income types is the best guide for tax policy, with countercyclical tax measures applied uniformly. - Other tax issues meriting attention: - role of aggressive tax planning (including across borders) in obfuscating financial arrangements, - tax impacts on risk-taking, - proper treatment of tax losses. *Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/np/pp/eng/2009/_021909.pdf* ### 1. The years preceding the crisis were years of high global growth. For the most ### 1. The years preceding the crisis were years of high global growth. For the most ### Pre-crisis macro-financial conditions - Productivity growth was high and inflation was stable in most countries, indicating activity growth was roughly consistent with growth in the economy’s potential. - Short-term rates were low, reflecting accommodative monetary policy; long-term rates were also low, reflecting high saving in Asian and oil surplus countries and low saving in the United States. - Low interest rates and limited volatility prompted a search for yield and underestimation of risks, pushing up asset prices (stocks and housing) in the United States, other advanced countries, and emerging markets. - Central bank frameworks: increasing popularity of inflation targeting; some central banks focused nearly exclusively on inflation stabilization, others weighted aggregate activity more explicitly. Few took sufficient account of risks from asset price increases or leverage. ### How benign conditions fed systemic risk - Low rates, together with excessive optimism, contributed to: - rising asset prices across asset classes; - increased risk-taking and creation/purchase of ever riskier assets; - development of off-balance-sheet structures that masked maturity mismatches and liquidity vulnerabilities. - Practical limits of regulation: regulation “did not” stop the build up of huge risks below regulators’ radar, in banks and in the shadow banking system. - Monetary policy limits: monetary policy easing and last-resort lending are showing their limits when financial system solvency is systemically impaired or in serious doubt; sharp decreases in policy rates since the onset of the crisis have not been sufficient to stave off a steep downturn. ### Low rates, global imbalances, and capital flows - Drivers of low long-term rates: high world saving, in particular strong demand for safe assets from Asia (in particular China) and oil exporting countries; strong global preference for U.S. assets (considered less risky and more liquid). - Global imbalances: large U.S. current account deficits matched by large current account surpluses elsewhere; reflected in large capital flows from surplus countries into the United States. - Pre-crisis worry focused on a sudden reversal of capital flows and a disorderly dollar depreciation; instead, the crisis manifested as a sharp fall in confidence in the global financial system and a compression in U.S. aggregate demand driven by the unwinding of the housing boom and curtailed credit flows. - Policy implications regarding capital inflows: - Large inflows can lead to excessive risk taking, exchange rate risk exposure, currency and asset-price appreciations followed by abrupt reversals, and pressure on demand and output. - Monetary policy may work poorly to slow activity in the face of inflows because higher interest rates can make domestic assets more attractive. - Two policy issues: revisit when and how to react to large imbalances through macroeconomic and structural policies affecting saving and investment; consider prudential measures to reduce systemic risk associated with large capital inflows (e.g., constraints on foreign exchange exposure). ### Asset price booms, credit booms, and systemic risk - Key distinction: not all booms end in financial distress; what matters is who holds the assets and how a bust affects financial institutions. - Factors increasing systemic risk: - High leverage associated with funding of the boom; - High involvement of banks and financial intermediaries; - Off-balance-sheet obligations and maturity/currency mismatches; - Widespread foreign-currency lending to unhedged domestic agents. - Examples: dot-com bust had limited bank/credit involvement and resulted in a relatively mild recession; by contrast, booms fueled by bank credit have led to severe crises (Great Depression, Japan 1980s, East Asian crisis, Scandinavian crises). - Lending based on rising collateral values is hazardous: falls in collateral values tighten lending, force distressed asset sales, deteriorate bank capital and liquidity, and can freeze credit supply. - What matters for transmission of shocks is the liability structure of holders of credit risk (maturity mismatch and leverage). ### Empirical patterns of credit booms and crisis incidence - Only a minority, "20 percent", of credit booms (defined as episodes of credit growth above a certain threshold from a historical trend) has ended in a crisis. - The probability of a financial crisis increases significantly with booms: "by between 50 and 75 percent". - Larger size and longer duration of a boom increase crisis likelihood: - Booms that last "more than 7 years" are twice as likely to end up in a crisis. - Credit booms coinciding with higher inflation, fast rising real estate prices, and, to a lesser extent, lower growth and large current account deficits are more likely to end in a crisis. - Empirical early-warning power is limited: the ability of existing empirical models to distinguish “good” from “bad” booms is relatively low. ### Features that amplified the recent crisis - Four elements explaining the severity and global scale: 1. Increased balance-sheet opaqueness and reliance on wholesale funding increased systemic fragility; complexity of instruments undermined price discovery and led to market illiquidity once house prices fell and defaults rose. 2. Increased interconnectedness of financial institutions and markets, more highly correlated financial risks, and the size/centrality of U.S. financial markets intensified cross-market and cross-border spillovers. 3. High degree of leverage across several sectors converted liquidity concerns into solvency worries for many financial institutions; on the borrower side, high loan-to-income and loan-to-value mortgages increased household exposure to shocks and negative equity risk. 4. Prominent role of household indebtedness complicates crisis resolution—moral hazard, large case numbers, equity/distribution issues, and political sensitivities slow and complicate household debt restructuring. - Data context referenced: - For the current U.S. crisis, the beginning date is assumed to be "2007:3". - Household debt series span "1952-2008". ### Policy discussion and directions - Re-examine the role of macroeconomic policy in managing credit and asset price booms: - Monetary policy: stronger case for a framework that incorporates longer-term implications of asset-price booms for inflation and growth. - Regulation and prudential policy: while regulation may be theoretically preferable to monetary intervention, in practice risks accumulated outside regulators’ sight; potential role for countercyclical prudential policies to tame speculative booms (discussed in greater detail in companion paper IMF (2009a)). - Prudential measures to manage capital inflows: e.g., constraints on foreign exchange exposure of domestic financial institutions and other borrowers. - Recognize limits of monetary policy and last-resort lending when solvency is in doubt; policy mixes need to address systemic risk buildup rather than rely solely on ex-post cleanup. *Source: IMF chapter section on macroeconomic policy, credit and asset price booms (text as provided).* ### 22. While aggregate credit growth in the United ### _021909 - 22. While aggregate credit growth in the United ### Credit growth and household leverage - Credit to households rose rapidly after 2000, driven largely by growth in mortgages. - Interest rates below historical averages and financial innovation contributed to the increase in outstanding household debt. - Despite low interest rates, debt service relative to disposable income reached a historical high. - Increased household leverage, coupled with prospects of a depletion of household equity, left households vulnerable to: - declines in house prices, - tightening credit conditions, and - a slowdown in economic activity. - Slower credit expansion to the corporate sector contained aggregate credit growth because corporations had high internal earnings and tapped more capital markets. ### Housing boom dynamics and systemic exposure - House prices peaked six quarters prior to the beginning of the banking crisis, after rising by more than 30 percent in the previous five years. - The housing boom’s overall size and dynamics were remarkably similar to house price developments in the previous five major banking crises (Big 5): Finland, 1991; Japan, 1992; Norway, 1987; Spain, 1977; and Sweden, 1991. - The recent U.S. housing boom was funded through an increase in mortgages originated by banks and non-banks, with a large portion securitized. - Perception in the upswing: risk was passed to investors with longer-term and less-leveraged liability structures. - The surprise in the bust: banks (and highly leveraged broker-dealers) had far larger than anticipated exposures to the housing sector through their SIVs, conduits, and trading books. - Given the liability structure (maturity mismatch and leverage) of these holders of credit risk, the housing downturn became a threat to financial and macroeconomic stability. - Regions with faster mortgage origination growth and sharper house price increases are witnessing greater increases in delinquency rates. - Mechanisms linking credit booms to crises: - increase in leverage of borrowers (and lenders), - decline in lending standards (e.g., significant increase in loan-to-income ratios and a decline in mortgage denial rates) not explained by underlying fundamentals. ### International patterns and capital flows - Credit aggregates grew extremely fast in the United Kingdom, Spain, Iceland, and several Eastern European countries in the run-up to the crisis. - These credit expansions fueled real estate booms across Eastern and Western Europe, including the United Kingdom and Iceland. - Increased household leverage generally supported these housing booms. - For Eastern Europe and some emerging markets, a clear relationship can be documented between credit growth and capital inflows. - Risks were exacerbated in many countries by widespread unhedged foreign-currency borrowing by households. ### Implications for macroeconomic policy — Overview - How assets are held and who is exposed to crashes matters for whether and how policy should respond to a boom. - Asset price booms supported through leveraged financing and involving financial intermediaries should be dealt with because they entail risks for the supply of credit; other booms could more likely be left to themselves. - Monetary policy and procyclical prudential policies can help contain dangerous booms. - Fiscal space to deal with a potential crisis should be built during upswing and tax distortions favoring indebtedness and leverage should be eliminated. ### Monetary policy: when, whether, and how to react - Benign neglect view: central banks should focus on inflation (and growth); asset prices monitored only insofar as they carry information on the economy. - Arguments for stricter monitoring and action: - Narrow focus to episodes involving credit and the banking system makes identification of dangerous booms easier. - Policy actions can be undertaken on a probabilistic basis if inaction may lead to catastrophic scenarios. - Monetary authorities can influence market behavior through statements and analysis. - Useful indicators and horizons: - Ratio of credit to GDP and its growth rate provide warning bells for overall leverage. - Complement with other leverage measures, borrower data, and balance-sheet exposures. - International Investment Position and the capital account provide complementary information in open economies. - Research suggests some variables can predict output and inflation even three to five years out. - Special attention to real estate booms given high borrower leverage. - Need for systemic risk measures: - Develop new measures complementing firm-centric regulatory variables, focusing on system-wide leverage, aggregate foreign exposure, etc. - Monetary policy’s role and limits: - Monetary policy should take into account macro-financial stability, not just price stability. - Under certain conditions, “leaning against the wind” by tightening monetary policy may yield long-term benefits for growth and inflation. - Financial stability need not be an explicit target; instead measures of financial stability or asset-price stability can be integrated into policy frameworks alongside inflation and the output gap. - Monetary policy acts with longer lags on asset prices than typical inflation-targeting horizons. - Monetary policy is a blunt tool: during booms, high expected returns can make marginal interest rate changes ineffective. - Evidence: denial rate for prime mortgage applications correlated with the Federal Funds rate; denial rates in subprime market were uncorrelated with the Federal Funds rate. - Capital account openness limits effectiveness: restrictive monetary policy can decrease domestic-currency lending but increase foreign-currency loans, possibly raising risks. ### Prudential and supervisory policy (monetary policy versus regulation) - Primary burden to curb credit booms should be on flexible prudential and supervision policies that mitigate procyclicality. - Prudential and administrative measures can be more targeted and less costly than interest rate changes. - Examples of recommended prudential actions: - Increase minimum regulatory capital requirements during upswing and lower them in downturns. - Encourage more aggressive provisioning during periods of fast credit growth. - Move beyond firm-level focus to system-wide measures. - Measures to reduce specific risks: - higher capital and provisioning requirements, - more intensive surveillance of potential problem banks, - appropriate disclosure requirements of banks’ risk management policies, - limits on sectoral loan concentration, - tighter eligibility and collateral requirements for certain loan categories, - limits on foreign exchange exposure, - maturity mismatch regulations. - Measures to reduce distortions and incentives for excessive borrowing: - eliminate implicit foreign exchange guarantees, - public risk awareness campaigns. - Financial globalization and regulatory circumvention: - cross-border coordination is required to avoid loopholes (currency substitution, activity switching to offshore centers). - Coordination among host- and home-country regulators and monetary authorities is critical for liquidity and solvency support during busts. ### Fiscal policy: buffers, taxation, and neutrality - Fiscal policy did not play a major proximate role in the run up to the crisis, though large U.S. fiscal deficits were a factor behind global imbalances. - Two lessons from the crisis regarding fiscal policy: - Budget deficits were not reduced sufficiently during boom years when revenues were high, limiting fiscal space to fight the crisis. - The structure of taxation is biased toward debt financing through deductibility of interest payments; this bias increases private sector vulnerability and should be eliminated. - Fiscal policy roles: - Establish fiscal buffers in good times; rules-based frameworks can help. - Fiscal policy can mitigate booms and reduce vulnerability buildup by lowering demand pressures at the aggregate level. - Tax distortions and housing: - Mortgage interest deductibility favors housing borrowing and encourages accumulation of gross housing debt. - One estimate for the United States suggests a tax subsidy to owner occupation of about 19 percent of user costs on average, and around 8 percent for low-income households. - Deductibility of interest payments against corporation tax but not return to equity creates a bias toward debt finance. - Technical solutions exist to reduce these distortions; political difficulties can be overcome (example: United Kingdom phased out mortgage interest relief). - A few countries have adopted corporate tax systems that level the playing field between debt and equity finance. - Tax policy and asset prices: - Tax provisions may affect level, growth, and volatility of asset prices, but ad hoc tax changes are unlikely the best way to control speculative booms. - Financial regulatory measures are likely to be better targeted; neutrality across asset and income types is the best guide for tax policy, with countercyclical tax measures applied uniformly. - Other tax issues meriting attention: - role of aggressive tax planning (including across borders) in obfuscating financial arrangements, - tax impacts on risk-taking, - proper treatment of tax losses. *Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/np/pp/eng/2009/_021909.pdf* --- _Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/np/pp/eng/2009/_021909.pdf_