Mitigating the Deadly Embrace in Financial Cycles: Countercyclical Buffers and Loan-to-Value Limits
April 8, 2016
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Summary
This paper presents a new version of MAPMOD (Mark II) to study the effectiveness of macroprudential regulations. We extend the original model by explicitly modeling the housing market. We show how household demand for housing, house prices, and bank mortgages are intertwined in what we call a deadly embrace. Without macroprudential policies, this deadly embrace naturally leads to housing boom and bust cycles, which can be very costly for the economy, as shown by the Global Financial Crisis of 2008-09.
Subject: Bank credit, Banking, Housing, Housing prices, Macroprudential policy instruments
Keywords: bank lending, credit cycle, house price, lending behavior, LTV limit, risk matrix, WP
Pages:
26
Volume:
2016
DOI:
Issue:
087
Series:
Working Paper No. 2016/087
Stock No:
WPIEA2016087
ISBN:
9781484323052
ISSN:
1018-5941
