We develop a DSGE model with heterogeneous agents, where savers own firms and riskpricing banks while borrowers require loans to establish their consumption plans. The bank lends at an external finance premium (EFP) over the policy rate as a function of the asset price, housing collateral, the demand for loans and their perceived riskiness. We suggest that the close relationship between aggregate consumption and house prices is related to collateral effects. We also outline the role of the EFP in determining consumption spillovers between borrowers and lenders. We solve the model with occasionally-binding constraints to examine the redistributive role of macro-prudential policies in terms of welfare. Countercyclical deployment of the loan-to-value constraint placed on borrowers can limit the scale of the downturn from a negative house price shock. Furthermore, when the zero lower bound acts to constrain monetary policy, looser macroprudential policies can act as an effective substitute for lower policy rates. Finally, we show that co-ordinated macroprudential and fiscal policies can also attenuate the welfare losses that arise from uncertainty banks may face about default probabilities.

Chadha, J., Corrado, G., Corrado, L., De Lorenzo Buratta, I. (2021). The Role of Macroprudential Policy in Times of Trouble. In F.S.D. Banco de Portugal Eurosystem (a cura di), The Role of Macroprudential Policy in Times of Trouble. Lisboa:Banco de Portugal • www.bportugal.pt • Edition Economics and Research Department.

The Role of Macroprudential Policy in Times of Trouble

Corrado G.;Corrado L.;De Lorenzo Buratta I.
2021-01-01

Abstract

We develop a DSGE model with heterogeneous agents, where savers own firms and riskpricing banks while borrowers require loans to establish their consumption plans. The bank lends at an external finance premium (EFP) over the policy rate as a function of the asset price, housing collateral, the demand for loans and their perceived riskiness. We suggest that the close relationship between aggregate consumption and house prices is related to collateral effects. We also outline the role of the EFP in determining consumption spillovers between borrowers and lenders. We solve the model with occasionally-binding constraints to examine the redistributive role of macro-prudential policies in terms of welfare. Countercyclical deployment of the loan-to-value constraint placed on borrowers can limit the scale of the downturn from a negative house price shock. Furthermore, when the zero lower bound acts to constrain monetary policy, looser macroprudential policies can act as an effective substitute for lower policy rates. Finally, we show that co-ordinated macroprudential and fiscal policies can also attenuate the welfare losses that arise from uncertainty banks may face about default probabilities.
Settore SECS-P/01
Settore SECS-P/02
English
Rilevanza internazionale
Capitolo o saggio
Heterogeneous households, Credit constraints, Housing collateral, Asset prices, Bank lending, Macro-prudential tools, Fiscal and monetary policy.
Chadha, J., Corrado, G., Corrado, L., De Lorenzo Buratta, I. (2021). The Role of Macroprudential Policy in Times of Trouble. In F.S.D. Banco de Portugal Eurosystem (a cura di), The Role of Macroprudential Policy in Times of Trouble. Lisboa:Banco de Portugal • www.bportugal.pt • Edition Economics and Research Department.
Chadha, J; Corrado, G; Corrado, L; De Lorenzo Buratta, I
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2108/312573
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