Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/161897
Authors: 
Bachmann, Ruediger
Rüth, Sebastian
Year of Publication: 
2017
Series/Report no.: 
CESifo Working Paper 6458
Abstract: 
What are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets, as measured by loan-to-value (LTV) ratios? In a structural VAR, GDP and business investment increase following an expansionary LTV shock. Residential investment, by contrast, falls, a result that depends on the systematic reaction of monetary policy. We show that, historically, the Fed tended to respond directly to expansionary LTV shocks by raising the monetary policy instrument, and, as a result, mortgage rates increase and residential investment declines. The monetary policy reaction function in the US appears to include lending standards in residential markets, a finding we confirm in Taylor rule estimations. Without the endogenous monetary policy reaction residential investment increases. House prices and household (mortgage) debt behave in a similar way. This suggests that an exogenous loosening of LTV ratios is unlikely to explain booms in residential investment and house prices, or run ups in household leverage, at least in times of conventional monetary policy.
Subjects: 
loan-to-value ratios
monetary policy
residential investment
structural VAR
Cholesky identification
Taylor rules
JEL: 
E30
E32
E44
E52
Document Type: 
Working Paper

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