## Household Debt and Borrower-Based Measures in Finland: Insights from a Heterogeneous Agent Model

_IMF Working Papers, December 15, 2023_

## Source details

**Canonical URL:** [Household Debt and Borrower-Based Measures in Finland: Insights from a Heterogeneous Agent Model](https://www.imf.org/en/publications/wp/issues/2023/12/15/household-debt-and-borrower-based-measures-in-finland-insights-from-a-heterogeneous-agent-542425)

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## Bibliographic details
- Authors: Fumitaka Nakamura
- Published: December 15, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400263132.001

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### Summary and research question
- The paper analyzes the effects of borrower-based macroprudential tools in Finland using a heterogeneous agent model.
- Households endogenously determine housing size and liquid asset levels under two borrowing constraints:
  - (i) a loan-to-value (LTV) limit
  - (ii) a debt-to-income (DTI) limit
- The study assesses how these tools affect consumption dynamics following an unexpected negative income shock.

### Main findings
- Under an unexpected negative income shock, a larger and more persistent drop in consumption is observed under the LTV limit compared to the DTI limit.
- DTI caps, while unpopular with lower income households because they limit borrowing amounts, are beneficial on distributional grounds for stabilizing consumption.
- DTI caps mitigate the consumption decline in recessions by restricting high leverage.
- DTI caps can usefully complement LTV caps.

### Policy implications
- Implementing DTI caps can stabilize aggregate consumption in downturns by constraining excessive household leverage.
- Policymakers should consider using DTI caps alongside existing LTV limits to improve macroprudential resilience and distributional outcomes.

### Model and mechanism (methodology)
- A heterogeneous agent framework where households choose housing size and liquid assets subject to borrowing constraints.
- Two constraint regimes are compared directly: an LTV limit versus a DTI limit.
- The primary shock analyzed is an unexpected negative income shock and its impact on consumption dynamics under each constraint.

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## Content in this bundle

- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2023/12/15/household-debt-and-borrower-based-measures-in-finland-insights-from-a-heterogeneous-agent-542425_