IMF Working Papers

Calibrating Macroprudential Policies in Europe Amid Rising Housing Market Vulnerability

By Laura Valderrama

March 24, 2023

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Format: Chicago

Laura Valderrama. Calibrating Macroprudential Policies in Europe Amid Rising Housing Market Vulnerability, (USA: International Monetary Fund, 2023) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Housing market developments are in the spotlight in Europe. Over-stretched valuations amid tightening financial conditions and a cost-of-living crisis have increased risks of a sustained downturn and exposed challenging trade-offs for macroprudential policy between ensuring financial system resilience and smoothing the macro-financial cycle. Against this backdrop, this paper provides detailed considerations regarding how to (re)set macroprudential policy tools in response to housing-related systemic risk in Europe, providing design solutions to avoid unintended consequences during a tightening phase, and navigating the trade-offs between managing the build-up of vulnerabilities and the macro-financial cycle in a downturn. It also proposes a novel framework to measure the effectiveness of tools and avoid overlaps by quantifying the risks addressed by different macroprudential instruments. Finally, it introduces a taxonomy allowing to assess a country’s macroprudential stance and whether adjustments to current policy settings are warranted—such as the relaxation of capital-based tools and possibly some borrower-based measures in the event of a more severe downturn.

Keywords: Economic cycle, Financial stability, Household vulnerability, Housing markets, Income distribution, Macroprudential policy.

Publication Details

  • Pages:

    46

  • Volume:

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  • DOI:

    ---

  • Issue:

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  • Series:

    Working Paper No. 2023/075

  • Stock No:

    WPIEA2023075

  • ISBN:

    9798400237775

  • ISSN:

    1018-5941