Macroprudential and Monetary Policy Interactions in a DSGE Model for Sweden

Author/Editor:

Jiaqian Chen ; Francesco Columba

Publication Date:

March 23, 2016

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

We analyse 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. We find that demand-side macroprudential measures are more effective in curbing household debt ratios than monetary policy, and they are less costly in terms of foregone consumption. A tighter macroprudential stance is also found to be welfare improving, by promoting lower consumption volatility in response to shocks, especially when using a combination of macroprudential instruments.

Series:

Working Paper No. 2016/074

Subject:

Amortization Consumption External debt Financial institutions Housing Housing prices Mortgages National accounts Prices

English

Publication Date:

March 23, 2016

ISBN/ISSN:

9781475546545/1018-5941

Stock No:

WPIEA2016074

Pages:

58

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