The Costs of Macroprudential Policy

50 Pages Posted: 21 Aug 2018

See all articles by Björn Richter

Björn Richter

Universitat Pompeu Fabra; Barcelona Graduate School of Economics (Barcelona GSE)

Moritz Schularick

University of Bonn - Department of Economics; Centre for Economic Policy Research (CEPR)

Ilhyock Shim

Bank for International Settlements (BIS)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2018

Abstract

Central banks increasingly rely on macroprudential measures to manage the financial cycle. However, the effects of such policies on the core objectives of monetary policy to stabilise output and inflation are largely unknown. In this paper we quantify the effects of changes in maximum loan-to-value (LTV) ratios on output and inflation. We rely on a narrative identification approach based on detailed reading of policy-makers' objectives when implementing the measures. We find that over a four year horizon, a 10 percentage point decrease in the maximum LTV ratio leads to a 1.1% reduction in output. As a rule of thumb, the impact of a 10 percentage point LTV tightening can be viewed as roughly comparable to that of a 25 basis point increase in the policy rate. However, the effects are imprecisely estimated and the effect is only present in emerging market economies. We also find that tightening LTV limits has larger economic effects than loosening them. At the same time, we show that changes in maximum LTV ratios have substantial effects on credit and house price growth. Using inverse propensity weights to rerandomise LTV actions, we show that these effects are likely causal.

Keywords: loan-to-value ratios, local projections, macroprudential policy, narrative approach

JEL Classification: E58, G28

Suggested Citation

Richter, Björn and Schularick, Moritz and Shim, Ilhyock, The Costs of Macroprudential Policy (August 2018). CEPR Discussion Paper No. DP13124, Available at SSRN: https://ssrn.com/abstract=3235608

Björn Richter (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Moritz Schularick

University of Bonn - Department of Economics ( email )

Bonn
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ilhyock Shim

Bank for International Settlements (BIS) ( email )

78F, Two International Finance Centre
8 Finance Street, Central
Hong Kong, n/a n/a
Hong Kong

HOME PAGE: http://www.bis.org/author/ilhyock_shim.htm

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