Mitigating the Deadly Embrace in Financial Cycles: Countercyclical Buffers and Loan-to-Value Limits
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Summary:
This paper presents a new version of MAPMOD (Mark II) to study the effectiveness of macroprudential regulations. We extend the original model by explicitly modeling the housing market. We show how household demand for housing, house prices, and bank mortgages are intertwined in what we call a deadly embrace. Without macroprudential policies, this deadly embrace naturally leads to housing boom and bust cycles, which can be very costly for the economy, as shown by the Global Financial Crisis of 2008-09.
Series:
Working Paper No. 2016/087
Subject:
Bank credit Banking Housing Housing prices Macroprudential policy instruments
English
Publication Date:
April 8, 2016
ISBN/ISSN:
9781484323052/1018-5941
Stock No:
WPIEA2016087
Pages:
26
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