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SYSTEMATIC MONETARY POLICY AND THE MACROECONOMIC EFFECTS OF SHIFTS IN RESIDENTIAL LOAN‐TO‐VALUE RATIOS
Author(s) -
Bachmann Rüdiger,
Rüth Sebastian K.
Publication year - 2020
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12432
Subject(s) - economics , structural vector autoregression , monetary economics , vector autoregression , loan to value ratio , monetary policy , shock (circulatory) , investment (military) , value (mathematics) , loan , business cycle , mortgage loan , macroeconomics , finance , mortgage insurance , medicine , machine learning , casualty insurance , politics , political science , law , computer science , insurance policy
What are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets, as measured by loan‐to‐value (LTV) ratios? Using a structural vector autoregression (VAR), we find that GDP and business investment increase following an expansionary LTV shock. Residential investment, by contrast, falls after a small initial uptick, a result that depends on the systematic reaction of monetary policy. We show that, historically, the Fed tended to respond to expansionary LTV shocks by raising the monetary policy instrument, and, as a result, mortgage rates increased and residential investment declined. House prices are affected in a similar manner.