Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/123741 
Year of Publication: 
2014
Series/Report no.: 
Bank of Canada Working Paper No. 2014-58
Publisher: 
Bank of Canada, Ottawa
Abstract: 
In this paper, we build a dynamic stochastic general-equilibrium model with housing and household debt, and compare the effectiveness of monetary policy, housing-related fiscal policy, and macroprudential regulations in reducing household indebtedness. The model features long-term fixed-rate borrowing and lending across two types of households, and differentiates between the flow and the stock of household debt. We use Bayesian methods to estimate parameters related to model dynamics, while level parameters are calibrated to match key ratios in the U.S. data. We find that monetary tightening is able to reduce the stock of real mortgage debt, but leads to an increase in the household debt-toincome ratio. Among the policy tools we consider, tightening in mortgage interest deduction and regulatory loan-to-value (LTV) are the most effective and least costly in reducing household debt, followed by increasing property taxes and monetary tightening. Although mortgage interest deduction is a broader tool than regulatory LTV, and therefore potentially more costly in terms of output loss, it is effective in reducing overall mortgage debt, since its direct reach also extends to home equity loans.
Subjects: 
Housing
Transmission of monetary policy
Financial system regulation and policies
Economic models
JEL: 
E52
E62
R38
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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