Household Debt and Borrower-Based Measures in Finland: Insights from a Heterogeneous Agent Model

December 15, 2023

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Format: Chicago

Fumitaka Nakamura. Household Debt and Borrower-Based Measures in Finland: Insights from a Heterogeneous Agent Model, (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

We analyze the effects of borrower-based macroprudential tools in Finland. To evaluate the efficiency of the tools, we construct a heterogeneous agent model in which households endogenously determine their housing size and liquid asset levels under two types of borrowing constraints: (i) a loan-to-value (LTV) limit and (ii) a debt-to-income (DTI) limit. When an unexpected negative income shock hits the economy, we find that a larger and more persistent drop in consumption is observed under the LTV limit compared to the DTI limit. Our results indicate that although DTI caps tend to be unpopular with lower income households because they limit the amount they can borrow, DTI caps are beneficial even on distributional grounds in stabilizing consumption. Specifically, DTI caps mitigate the consumption decline in recessions by restricting high leverage, and thus, they can usefully complement LTV caps.

Subject: Consumption, Financial sector policy and analysis, Housing, Income, Macroprudential policy, Macroprudential policy instruments, National accounts

Keywords: Baltics, Consumption, Consumption transition, Debt-to-income ratio, DTI cap, DTI limit, Global, Household debt, Household indebtedness, Housing, Income, Loan-to-value ratio, Macroprudential policy, Macroprudential policy instruments, Macroprudential policy., Measures in Finland

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/262
Stock No:

WPIEA2023262
ISBN:

9798400263132
ISSN:

1018-5941

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