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On the Effectiveness of Loan-to-Value Regulation in a Multiconstraint Framework

Grodecka, Anna LU (2019) In Journal of Money, Credit and Banking
Abstract

Models in the infinite horizon macro-housing literature often assume that borrowers are constrained exclusively by the loan-to-value (LTV) ratio. Motivated by the Swedish microdata, I explore an alternative arrangement where borrowers are constrained by a collateral constraint and by a debt-service-to-income ratio. While stricter LTV limits are often considered as a measure to tackle the rise in household indebtedness, I find that policy designed to lower the maximum permissible LTV ratio may actually leave the debt-to-GDP ratio unchanged and increase housing prices in equilibrium if borrowers are bound by two constraints at the same time.

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author
organization
publishing date
type
Contribution to journal
publication status
epub
subject
keywords
borrowing constraints, debt to GDP, debt-service-to-income ratio, E32, E44, E58, G21, household indebtedness, loan-to-value ratio, macroprudential policy, occasionally binding constraints, R21
in
Journal of Money, Credit and Banking
publisher
Wiley-Blackwell
external identifiers
  • scopus:85066013502
ISSN
0022-2879
DOI
10.1111/jmcb.12623
language
English
LU publication?
yes
id
9707f873-ffff-4831-8714-ae8e249e3275
date added to LUP
2019-06-14 13:58:50
date last changed
2019-06-25 03:56:39
@article{9707f873-ffff-4831-8714-ae8e249e3275,
  abstract     = {<p>Models in the infinite horizon macro-housing literature often assume that borrowers are constrained exclusively by the loan-to-value (LTV) ratio. Motivated by the Swedish microdata, I explore an alternative arrangement where borrowers are constrained by a collateral constraint and by a debt-service-to-income ratio. While stricter LTV limits are often considered as a measure to tackle the rise in household indebtedness, I find that policy designed to lower the maximum permissible LTV ratio may actually leave the debt-to-GDP ratio unchanged and increase housing prices in equilibrium if borrowers are bound by two constraints at the same time.</p>},
  author       = {Grodecka, Anna},
  issn         = {0022-2879},
  keyword      = {borrowing constraints,debt to GDP,debt-service-to-income ratio,E32,E44,E58,G21,household indebtedness,loan-to-value ratio,macroprudential policy,occasionally binding constraints,R21},
  language     = {eng},
  month        = {05},
  publisher    = {Wiley-Blackwell},
  series       = {Journal of Money, Credit and Banking},
  title        = {On the Effectiveness of Loan-to-Value Regulation in a Multiconstraint Framework},
  url          = {http://dx.doi.org/10.1111/jmcb.12623},
  year         = {2019},
}