Assessing the macroeconomic impact of alternative macroprudential policies

Abstract

Copyright © 2018 The Authors. This article assesses the effects on the wider economy and the overall costs and benefits of two alternative macroprudential policies - loan-to-value ratios on mortgage lending and variable bank capital adequacy targets. It also traces the potential effects of such policies if introduced prior to the subprime crisis. The work is performed within the National Institute Global Econometric Model, with a focus on three contrasting Group of 7 countries, Germany, Italy and the UK. Detailed banking sectors and addition of a macroprudential block to our model enable effects of policies to be captured. A further key innovation within the model is a systemic risk index that tracks the likelihood of the occurrence of a banking crisis and establishes thresholds at which macroprudential policies should be activated by the authorities. Capital adequacy impacts the economy by acting on the spread between borrowing and lending of corporates and households, while loan-to-value transmits through its impact on the housing market. We find generally loan-to-value policy has a lesser effect than capital adequacy on crisis probabilities and net benefits, but there is considerable cross country variation. We show that the introduction of macroprudential policy prior to the crisis would have led to improvement in a number of key macroeconomic measures and might thus have reduced the incidence of the crisis. We contend that the results are of major policy relevance in the light of the widespread introduction of macroprudential policies and the need for analysis of their effects.