Macroprudential and Monetary Policy Interactions in a DSGE Model for Sweden
IMF Working Papers, March 23, 2016
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- Macroprudential and Monetary Policy Interactions in a DSGE Model for Sweden
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Bibliographic details
- Authors: Jiaqian Chen, Francesco Columba
- Published: March 23, 2016
- Series: IMF Working Papers
Summary and main findings
- The paper analyses the effects of macroprudential and monetary policies and their interactions using an estimated dynamic stochastic general equilibrium (DSGE) model tailored to Sweden.
- Households face a ceiling on their loan-to-value ratio and must amortize their mortgages. The government grants mortgage interest payment deductions. Lending rates are affected by mortgage risk weights.
- Demand-side macroprudential measures are more effective in curbing household debt ratios than monetary policy.
- Demand-side macroprudential measures are less costly in terms of foregone consumption compared with monetary policy.
- A tighter macroprudential stance is welfare improving by promoting lower consumption volatility in response to shocks, especially when using a combination of macroprudential instruments.
Model features and assumptions
- Model type: estimated dynamic stochastic general equilibrium (DSGE) model tailored to Sweden.
- Household constraints and policies modeled explicitly:
- Ceiling on loan-to-value ratio (LTV cap).
- Mortgage amortization requirement.
- Mortgage interest payment deductibility (government granted).
- Lending rates influenced by mortgage risk weights.
- Focus on interactions between macroprudential instruments and monetary policy.
Policy implications and recommendations
- Prioritize demand-side macroprudential measures to curb household debt ratios, given higher effectiveness relative to monetary policy.
- Use combinations of macroprudential instruments to achieve welfare gains via reduced consumption volatility following shocks.
- Consider macroprudential tightening as a policy that can be welfare improving, with lower consumption costs than relying solely on monetary policy adjustments.
Subjects and keywords
- Subjects: Amortization, Consumption, External debt, Financial institutions, Housing, Housing prices, Mortgages, National accounts, Prices
- Keywords: Amortization, amortization requirement, Collateral Constraints, Consumption, Global, household debt, household mortgage debt, Housing, Housing prices, income effect, LTV cap, Macroprudential Policies, Monetary Policy, mortgage interest rate deductability, Mortgages, risk weight, WP
Source: IMF Working Paper — "Macroprudential and Monetary Policy Interactions in a DSGE Model for Sweden", Jiaqian Chen and Francesco Columba, March 23, 2016.