Loan-to-value policy in a bubble-creation economy

This paper provides a theoretical analysis of macroprudential policy in the form of loan-to-value (LTV) restrictions in a bubble-creation economy. Such policy measures have been used intensively in Asia to deal with credit and property price boom-bust cycles while the effectiveness remains unclear,...

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Bibliographic Details
Published in:Journal of Asian economics 2022-04, Vol.79, p.101433, Article 101433
Main Authors: Luangaram, Pongsak, Thepmongkol, Athakrit
Format: Article
Language:English
Subjects:
Bubble creation
Financial friction
Loan-to-value policy
Macroprudential policy
Overlapping generations model
Rational bubble
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Summary:This paper provides a theoretical analysis of macroprudential policy in the form of loan-to-value (LTV) restrictions in a bubble-creation economy. Such policy measures have been used intensively in Asia to deal with credit and property price boom-bust cycles while the effectiveness remains unclear, especially the country-specific cases. We find that the effect on investment and size of bubbles depends on the degree of financial development. Specifically, restrictive LTV policies tend to be more effective in dampening asset-price bubbles in economies that have a high degree of financial depth. High (low) financial depth implies that bubbles originally crowd out (in) investment, so that implementation of LTV policies causes bubbles to decrease (remain unchanged). These might explain some mixed empirical results of LTV policy on dampening asset-price growth.
ISSN:1049-0078
1873-7927
DOI:10.1016/j.asieco.2021.101433