A DSGE-based assessment of nonlinear loan-to-Value policies : Evidence from Hong Kong

Abstract

In the wake of the 2008-2009 global financial crisis, the macroeconomic discussion has returned to the topic of proactive macroprudential policies. One proactive approach, the use of loan-to-value (LTV) policies to curb booming property markets, has long been used by Hong Kong's monetary authorities to actively manage and mitigate the potential fallout from housing price bubbles. Here, we analyse the merits of this countercyclical macroprudential policy in a New Keynesian DSGE model. We conclude that nonlinear LTV policy rules implemented in reaction to episodes of high property price inflation can limit transmission of housing price cycle effects to the real economy. Keywords: Macroprudential policy, DSGE model, loan-to-value ratio, Hong Kong. JEL classification: C63, E21, E32, E69, F41.