Mr. Jiaqian Chen, Daria Finocchiaro, Jesper Lindé, and Karl Walentin
We examine the effects of various borrower-based macroprudential tools in a New Keynesian environment where both real and nominal interest rates are low. Our model features long-term debt, housing transaction costs and a zero-lower bound constraint on policy rates. We find that the long-term costs, in terms of forgone consumption, of all the macroprudential tools we consider are moderate. Even so, the short-term costs differ dramatically between alternative tools. Specifically, a loan-to-value tightening is more than twice as contractionary compared to loan-to-income tightening when debt is high and monetary policy cannot accommodate.
Mr. Marco Arena, Tingyun Chen, Mr. Seung M Choi, Ms. Nan Geng, Cheikh A. Gueye, Mr. Tonny Lybek, Mr. Evan Papageorgiou, and Yuanyan Sophia Zhang
Macroprudential policy in Europe aligns with the objective of limiting systemic risk, namely the risk of widespread disruption to the provision of financial services that is caused by an impairment of all or parts of the financial system and that can cause serious negative consequences for the real economy.
House prices in many advanced economies have risen substantially in recent decades. But experience indicates that housing prices can diverge from their long-run equilibrium or sustainable levels, potentially followed by adjustments that impact macroeconomic and financial stability. Therefore there is a need to monitor house prices and assess whether they are sustainable. This paper focuses on fundamentals expected to drive long run trends in house prices, including institutional and structural factors. The scale of potential valuation gaps is gauged on the basis of a cross-country panel analysis of house prices in 20 OECD countries.
This 2017 Article IV Consultation highlights Sweden’s continued strong economic growth. Real GDP is expected to rise by 3.1 percent in 2017, driven by both domestic demand and exports growing at a similar pace. Robust job creation of over 2 percent has lowered unemployment to 6.8 percent, or just 4.5 percent excluding full-time students. Housing price increases have moderated somewhat in 2017, to 7 percent year over year in September. Aided by large increases in new dwelling construction, signs of further market cooling have emerged in recent months. Household credit growth has also eased somewhat in 2017. Unexpectedly, strong government revenues in 2016 have carried forward into 2017, with the general government fiscal surplus projected at 1 percent of GDP.
This 2016 Article IV Consultation highlights Sweden’s strong economic performance, with real GDP growth heading for about 3.4 percent in 2016 on the heels of an expansion of just over 4 percent in 2015. Employment has increased by 1.5 percent so far in 2016, pushing unemployment down to about 7 percent. Growth is expected to moderate to a still solid 2.4 percent in 2017. The fiscal deficit is expected to be small in 2016, even as migration-related government spending has almost doubled to about 1.4 percent of GDP owing to the surge in refugee inflows in 2015.
We analyse the effects of macroprudential and monetary policies and their interactions using
an estimated dynamic stochastic general equilibrium (DSGE) model tailored to Sweden.
Households face a ceiling on their loan-to-value ratio and must amortize their mortgages.
The government grants mortgage interest payment deductions. Lending rates are affected by
mortgage risk weights. We find that demand-side macroprudential measures are more
effective in curbing household debt ratios than monetary policy, and they are less costly in
terms of foregone consumption. A tighter macroprudential stance is also found to be welfare
improving, by promoting lower consumption volatility in response to shocks, especially
when using a combination of macroprudential instruments.
International Monetary Fund. Asia and Pacific Dept
This paper discusses prospects for potential growth, house prices, household debt, and financial stability risks, and tax policy reforms in New Zealand. Despite having world-class institutions and strong policy framework, income levels remain low relative to other Organisation for Economic Co-operation and Development (OECD) countries. During 1980–2014, per capita income levels have remained about 20 percent below the OECD's average income. Longstanding structural issues need to be addressed to boost potential growth. House prices and household debt have increased rapidly in New Zealand over the past two decades. New Zealand's low national saving rate is a source of vulnerability and likely contributes to the relatively high interest rates needed to attract foreign capital.
Sweden is experiencing double-digit housing price gains alongside rising household debt. A
common interpretation is that mortgage lending boosted by expansionary monetary policy is
driving up house prices. But theory suggests the value of housing collateral is also important
for household’s capacity to borrow. This paper examines the interactions between housing
prices and household debt using a three-equation model, finding that household borrowing
impacts housing prices in the short-run, but the price of housing is the main driver of the
secular trend in household debt over the long-run. Both housing prices and household debt
are estimated to be moderately above their long-run equilibrium levels, but the adjustment
toward equilibrium is not found to be rapid. Whereas low interest rates have contributed to
the recent surge in housing prices, growth in incomes and financial assets play a larger role.
Policy experiments suggest that a gradual phasing out of mortgage interest deductibility is
likely to have a manageable effect on housing prices and household debt.
This 2015 Article IV Consultation highlights that Sweden's economy is performing well, with real GDP growth of 3.4 percent per year in the first three quarters of 2015, up from 2.3 percent in 2014. Job creation was robust in the first three quarters of 2015, helping bring the unemployment rate down to 7.2 percent in the third quarter. Core inflation rose to 1.4 percent per year on average in recent months, but remains below the 2 percent target. Solid growth of about 3 percent is expected to continue into 2016.