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Title: The costs of macroprudential deleveraging in a liquidity trap

Author(s): Jiaqian Chen, Daria Finocchiaro, Jesper Lindé and Karl Walentin

Publication Date: April 2020

Keyword(s): Collateral and borrowing constraints, Household Debt, housing prices, Mortgage interest deductibility, New Keynesian Model and zero lower bound

Programme Area(s): Monetary Economics and Fluctuations

Abstract: What are the effects of different borrower-based macroprudential tools when both real and nominal interest rates are low? We study this question in a New Keynesian model featuring long-term debt, housing transaction costs and a zero lower bound constraint on policy rates. We find that the long-term costs, in terms of output losses, of all the macroprudential tools we consider are moderate. However, the short-term costs differ substantially between tools. Moreover, the costs vary depending on the current state of economy and monetary policy. Specifically, a loan-to-value tightening is more than three times as contractionary compared to a loan-to-income tightening when debt is high and monetary policy cannot accommodate.

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Bibliographic Reference

Chen, J, Finocchiaro, D, Lindé, J and Walentin, K. 2020. 'The costs of macroprudential deleveraging in a liquidity trap'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14564