European Business Schools Librarian's Group

Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

House Prices, Capital Inflows and Macroprudential Policy

Maria Teresa Punzi () and Caterina Mendicino ()
Additional contact information
Maria Teresa Punzi: Department of Economics, Vienna University of Economics and Business
Caterina Mendicino: Economics and Research Department, Bank of Portugal

Abstract: This paper evaluates the monetary and macroprudential policies that mitigate the procyclicality arising from the interlinkages between current account deficits and financial vulnerabilities. We develop a two-country dynamic stochastic general equilibrium (DSGE) model with heterogeneous households and collateralised debt. The model predicts that external shocks are important in driving current account deficits that are coupled with run-ups in house prices and household debt. In this context, optimal policy features an interest-rate response to credit and a LTV ratio that countercyclically responds to house price dynamics. By allowing an interest-rate response to changes in financial variables, the monetary policy authority improves social welfare, because of the large welfare gains accrued to the savers. The additional use of a countercyclical LTV ratio that responds to house prices, increases the ability of borrowers to smooth consumption over the cycle and is Pareto improving. Domestic and foreign shocks account for a similar fraction of the welfare gains delivered by such a policy.

Keywords: house prices, financial frictions, global imbalances, saving glut, dynamic loan-to value ratios, monetary policy, optimized simple rules

JEL-codes: C33; E51; F32; G21 August 2014

Note: PDF Document

Full text files

wp180.pdf PDF-file 

Download statistics

Report problems with accessing this service to Sune Karlsson ().

This page generated on 2018-02-15 23:08:27.