Quotation Mendicino, Caterina and Punzi, Maria Teresa. 2014. House prices, capital inflows and macroprudential policy. Journal of Banking and Finance 49, 337-355.


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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.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Journal of Banking and Finance
Citation Index SSCI
WU Journalrating 2009 A
WU-Journal-Rating new FIN-A, STRAT-A, VW-B, WH-A
Language English
Title House prices, capital inflows and macroprudential policy
Volume 49
Year 2014
Page from 337
Page to 355
Reviewed? Y
URL http://www.sciencedirect.com/science/article/pii/S037842661400209X
DOI http://dx.doi.org/10.1016/j.jbankfin.2014.06.007

Associations

Projects
FinMaP: Financial Distortions and Macroeconomic Performance
People
Punzi, Maria Teresa (Former researcher)
External
Mendicino, Caterina (European Central Bank, Germany)
Organization
Department of Economics (Kubin) (Details)
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