DP14564 The costs of macroprudential deleveraging in a liquidity trap
|Author(s):||Jiaqian Chen, Daria Finocchiaro, Jesper Lindé, Karl Walentin|
|Publication Date:||April 2020|
|Date Revised:||March 2021|
|Keyword(s):||Collateral and borrowing constraints, Household Debt, housing prices, Mortgage interest deductibility, New Keynesian Model, zero lower bound|
|Programme Areas:||Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=14564|
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.