When is Macroprudential Policy Effective?
24 Pages Posted: 1 Apr 2015
Date Written: March 2015
Previous studies have shown that limits on loan-to-value (LTV) and debt-to-income (DTI) ratios can stabilise the housing market, and that tightening these limits tends to be more effective than loosening them. This paper examines whether the relative effectiveness of tightening vs. loosening macroprudential measures depends on where in the housing cycle they are implemented. I find that tightening measures have greater effects when credit is expanding quickly and when house prices are high relative to income. Loosening measures seem to have smaller effects than tightening, but the difference is negligible in downturns. Loosening being found to have small effects is consistent with where it occurs in the cycle.
Keywords: loan-to-value limit, debt-to-income limit, housing credit, house-price-to-income ratio
JEL Classification: E58, G28
Suggested Citation: Suggested Citation