European Business Schools Librarian's Group

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

Effectiveness of macroprudential policies under borrower heterogeneity

Maria Teresa Punzi and Katrin Rabitsch ()
Additional contact information
Maria Teresa Punzi: Department of Economics, Vienna University of Economics and Business
Katrin Rabitsch: Department of Economics, Vienna University of Economics and Business

Abstract: We study the impact of macroprudential policies using a novel model which takes into account households’ ability to borrow under different loan-to-value ratios which are tied to their collateral values. Such model generates a larger amplification in real and financial variables, compared to standard models that assume homogeneity in the leveraging and deleveraging process. Conditional on this model, we consider the implications of macroprudential policies that aim to lean against an excessive credit cycle. In particular, we allow macroprudential authorities to tighten excessive lending to higher leveraged households, whose riskiness had been evaluated too optimistically. We find that a policy that targets only the group of households that most strongly deleveraged after an adverse idiosyncratic housing investment risk shock, is welfare-improving at social and individual levels, relative to a macroprudential policy which targets all households in the economy.

Keywords: Endogenous Loan-to-Value ratio, Heterogeneity, Macroprudential Policy

JEL-codes: E23; E32; E44 September 2017

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