Towards Understanding Macrofinancial Impacts of Loan‐to‐Value Ratio Policy in New Zealand: A General Equilibrium Perspective

Abstract

We use a dynamic stochastic general equilibrium model as a framework for thinking about the transmission mechanism of loan‐to‐value macroprudential policy. We analyse the key channels through which the caps on loan‐to‐value ratios work to limit the speed of asset and credit cycles. We further analyse the mechanisms through which the caps support financial system resilience during asset price downturns that are of sufficient magnitude to cause financial and macroeconomic instability.

Introduction to the Policy Forum: Macroeconomic Consequences of Macroprudential Policies

“…Fukac et al () draw on the International Monetary Fund's macroprudential policy model (Benes, Kumhof and Laxton ) and build and calibrate a model of the New Zealand economy. They examine a scenario of a housing market boom reflecting expectations of further increases in demand for housing, which eventually unwinds due to lower demand (one possible source of which is a drop in inward migration).…”

“…Interestingly, in the model of Fukac et al (), banks can expand their balance sheets so as to maximise profits by extending lending to households conditional on regulatory requirements on capital adequacy. This means that the model allows banks to create new purchasing power to finance house price booms, as well as to exacerbate the negative effects of a bust.…”