IMF Working Papers

The Costs of Macroprudential Deleveraging in a Liquidity Trap

By Jiaqian Chen, Jiawen Tang, Jesper Lindé, Hyeon

June 12, 2020

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Jiaqian Chen, Jiawen Tang, Jesper Lindé, and Hyeon. The Costs of Macroprudential Deleveraging in a Liquidity Trap, (USA: International Monetary Fund, 2020) accessed October 10, 2024

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.

Subject: Consumption, Financial services, Housing, Housing prices, Labor, National accounts, Prices, Zero lower bound

Keywords: Collateral and borrowing constraints, Consumption, DSTI constraint, Global, Household debt, Housing, Housing prices, Long-term debt, Lower bound, LTI economy, LTV constraint, LTV tightening, Mortgage interest deductibility, New Keynesian model, Transmission mechanism, WP, Zero lower bound

Publication Details

  • Pages:

    66

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2020/089

  • Stock No:

    WPIEA2020089

  • ISBN:

    9781513546803

  • ISSN:

    1018-5941