The Real Effects of Loan-to-Value Limits: Empirical Evidence from Korea

54 Pages Posted: 17 Jan 2020

See all articles by Victor Pontines

Victor Pontines

South East Asian Central Banks (SEACEN) Research and Training Centre

Date Written: January 17, 2020

Abstract

This study adds to a recent and growing literature that assesses the effects of macroprudential policy. We compare the effects of monetary policy and loan-to-value ratio shocks for Korea, an inflation targeting economy and an active user of loan-to-value limits. We identify shocks using sign-restricted structural VARs and rely on a recent approach within this method to conduct structural inference. This study finds that both monetary policy and loan-to-value ratio shocks have effects on different measures of credit, i.e., real bank credit, real total credit and real household credit. We also find that both shocks have non-negligible effects on real house prices, including effects on real output, real consumption and real investment. We do, however, find that loan-to-value ratio shocks have negligible effects on the price level. These findings indicate that for the period covered by this study, limits on loan-to-value achieved their financial stability objectives in Korea in terms of limiting credit and house price appreciation under an inflation targeting regime. Furthermore, it attained these objectives without posing any threat to its price stability objective. Overall, these findings suggest that limits on loan-to-value have important aggregate consequences despite it being a sectoral, targeted policy instrument.

Keywords: Macroprudential Policy, Limits on Loan-to-Value, Monetary Policy, Sign Restrictions, Impulse Response, Forecast Error Variance Decomposition

JEL Classification: E31, E32, E52, E58, G28

Suggested Citation

Pontines, Victor, The Real Effects of Loan-to-Value Limits: Empirical Evidence from Korea (January 17, 2020). CAMA Working Paper No. 2/2020. Available at SSRN: https://ssrn.com/abstract=3521008 or http://dx.doi.org/10.2139/ssrn.3521008

Victor Pontines (Contact Author)

South East Asian Central Banks (SEACEN) Research and Training Centre ( email )

Level 5, Sasana Kijang, Bank Negara Malaysia
2 Jalan Dato’ Onn
Kuala Lumpur, 50480
Malaysia

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