Margarita Rubio (University of Nottingham) - The Conduct of LTV Policy under Inflationary Shocks

Research Seminar - Margarita Rubio (University of Nottingham) - The Conduct of LTV Policy under Inflationary Shocks

Co-authors: Fang Yao (Central Bank of Ireland)

Abstract:
This paper studies LTV policy as a macroprudential tool and its interactions with monetary policy, under an inflationary environment. The combination of inflation shocks and collateral constraints creates extra trade-offs extra trade-offs that call for the coordination between macroprudential and monetary policy. We employ a DSGE model with collateral constraints to show the implications of an optimized LTV rule for a welfare-based loss function, which includes housing and consumption gaps. Results show that, under inflation shocks, policy coordination improves welfare-based losses, compared to a non-coordination regime. The best welfare outcome lies where monetary policy is set to fight inflation but macroprudential policy accommodates for borrowers who are facing higher interest rates imposed by tightened monetary policy.

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