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
JEL(s):	E52, E58
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.