The Aggregate Demand Channel of Loan-to-Value Shocks

Abstract

This paper explores the aggregate and distributional effects of loan-to-value (LTV) tightening measures, and their interaction with monetary policy, using a Heterogeneous-Agent New Keynesian (HANK) model. Households in the model face income risk, housing decisions, and collateral constraints. Stricter LTV limits affect the economy through aggregate demand effects, triggering a decline in aggregate consumption, house prices and inflation. Our results suggest that general equilibrium channels amplify the impact of LTV tightening, disproportionately affecting highly leveraged borrowers. Stronger monetary policy accommodation mitigates these effects, limiting the aggregate costs of stricter LTV regulations and their unequal burden across households. These findings highlight the importance of coordinated macroprudential and monetary policies.

Keywords: JEL classification: D31, E21, G01, G21 Macroprudential policy, Monetary policy, Household heterogeneity, Incomplete markets, Credit frictions