Discussion paper

DP14564 The costs of macroprudential deleveraging in a liquidity trap

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.


Chen, J, D Finocchiaro, J Lindé and K Walentin (2020), ‘DP14564 The costs of macroprudential deleveraging in a liquidity trap‘, CEPR Discussion Paper No. 14564. CEPR Press, Paris & London. https://cepr.org/publications/dp14564