Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/237304 
Year of Publication: 
2020
Series/Report no.: 
CBM Working Papers No. WP/04/2020
Publisher: 
Central Bank of Malta, Valletta
Abstract: 
We extend the Central Bank of Malta's core DSGE model - MEDSEA - with housing and financial frictions to capture the important theoretical links betweeen house prices, credit and consumption. The model features a rich set of features that are inherent to small open economies in a monetary union. We add a borrowing constraint on a subset of households that is contigent on the value of housing wealth and a maximum loan-to-value (LTV) ratio. We also impose capital requirements on the financial intermediary through a minimum capital-to-assets ratio (CAR) constraint. These two requirements form the basis of a typical macroprudential regime in a developed economy. We show how the macroprudential authority can dampen the rise in credit and consumption during a credit boom by using these two policy tools to 'lean against the wind'. MEDSEA-FIN is therefore tailored to study macro-financial issues related to housing and credit, and the adequate policy responses.
Subjects: 
borrowing constraints
loan-to-value ratio
capital-to-assets ratio
macroprudential policy
JEL: 
C54
E44
E58
E60
Document Type: 
Working Paper

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