Macroprudential Policy and Household Wealth Inequality

Abstract

Macroprudential policies, such as caps on loan-to-value (LTV) ratios, have become part of the policy paradigm in emerging markets and advanced countries alike. Given that housing is the most important asset in household portfolios, relaxing or tightening access to mortgages may affect the distribution of household wealth in the country. In a stylised model we show that the final level of wealth inequality depends on the size of the LTV ratio, housing prices, credit cost and the strength of a bequest motive; ultimately with no unequivocal effect of LTV ratios on wealth inequality. These trade-offs are illustrated with estimations of "Gini Recentered Inuence Function" regressions on household survey data from 12 eurozone countries that participated in the first wave of the Household Finance and Consumption Survey (HFCS). The results show that, among the households with active mortgages, high LTV ratios at the time of acquisition are related to high contributions to wealth inequality today, while house price increases are negatively related to inequality contributions. A proxy for the strength of bequest motives tends to be negatively related with wealth inequality, but credit cost does not show a significant link to the distribution of wealth.

Central Bank Policies and Income and Wealth Inequality: A Survey

“…Their effects on borrowers with an already acquired mortgage may be different from the effects for those who intend to take out a mortgage. Stricter LTV caps at the time of acquisition make credit costlier and harder to obtain, as low-wealth households could finance a smaller fraction of the house value with a mortgage (Carpantier et al, 2017). However, as argued by Rubio and Carrasco-Gallego (2014), this macroprudential policy is welfare improving -lower LTV leads to lower household indebtedness and reduces the risk of future defaults, while borrowers benefit from financial stability.…”

“…Frost and van Stralen (2017) use macroprudential instruments from the database of Cerutti et al (2016) for 69 countries over the period 2000-2013 and analyze their relation with Gini coefficients of market and net income inequality. The other two papers use household surveys for, respectively, 12 euro-area countries based on HFCS data (Carpantier et al, 2017) and the state of Oregon in the USA (Zinman, 2010), to study wealth and consumption effects of macroprudential measures. All papers find evidence for redistributive effects of macroprudential policy.…”

“…23 Likewise, restrictions on consumer lending could have detrimental distributional effects as it forces households to shift into inferior substitutes (such as checking account overdrafts of various types and late bills), worsening their financial condition, and hindering productive investment and consumption smoothing (Zinman, 2010). On the other hand, caps on LTV ratios can reduce wealth inequality: low-wealth households find it harder to get a mortgage, which lowers their indebtedness, pushing wealth inequality downward (Carpantier et al, 2017).…”

Macroprudential Policies and Economic Growth

“…Borrowerrelated macroprudential policies influence the amount of credit placed into the economy, as well as the household wealth inequality as it is related to the increases in rents and in the value of land. Lower cost of credit associated to tighten LTV policies can increase wealth inequality (Carpantier et al 2018).…”

Wealth inequality: Theory, measurement and decomposition

“…Several papers have begun to use the RIF-Gini regressions to explore changes in income inequality (Choe andVan Kerm 2014, Gradin 2016). Carpentier et al (2017) have used the approach to assess the effects of caps on loan-to-value (LTV) ratios on net wealth inequality across several EU countries. 30 Cowell et al (2017) use RIF-Gini regressions to study the role of inheritance in wealth inequality across several OECD countries.…”