## Macroprudential and Monetary Policy Interactions in a DSGE Model for Sweden

_IMF Working Papers, March 23, 2016_

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## Bibliographic details
- Authors: Jiaqian Chen, Francesco Columba
- Published: March 23, 2016
- Series: IMF Working Papers

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### 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.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/macroprudential-and-monetary-policy-interactions-in-a-dsge-model-for-sweden-43825_