The Costs of Macroprudential Deleveraging in a Liquidity Trap

Author/Editor:

Jiaqian Chen ; Daria Finocchiaro ; Jesper Lindé ; Karl Walentin

Publication Date:

June 12, 2020

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

We examine the effects of various borrower-based macroprudential tools in a New Keynesian environment where both real and nominal interest rates are low. Our model features long-term debt, housing transaction costs and a zero-lower bound constraint on policy rates. We find that the long-term costs, in terms of forgone consumption, of all the macroprudential tools we consider are moderate. Even so, the short-term costs differ dramatically between alternative tools. Specifically, a loan-to-value tightening is more than twice as contractionary compared to loan-to-income tightening when debt is high and monetary policy cannot accommodate.

Series:

Working Paper No. 20/89

Subject:

English

Publication Date:

June 12, 2020

ISBN/ISSN:

9781513546803/1018-5941

Stock No:

WPIEA2020089

Format:

Paper

Pages:

66

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