Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/238067 
Year of Publication: 
2021
Citation: 
[Journal:] Economics: The Open-Access, Open-Assessment Journal [ISSN:] 1864-6042 [Volume:] 15 [Issue:] 1 [Publisher:] De Gruyter [Place:] Berlin [Year:] 2021 [Pages:] 3-27
Publisher: 
De Gruyter, Berlin
Abstract: 
As Korea's household debt has increased rapidly since the mid-2000s, concerns that its economy's hard-wired leveraging may negatively impact economic activity have grown. Calls are being made for policy actions to return the economy to its long-run trend. Housing preferences and monetary shocks can both trigger deleveraging, as most household debt is profoundly connected to the housing market, and debt growth increases sensitivity to interest rates. Constructing a dynamic stochastic general equilibrium model with heterogeneous households and the housing production sector, we simulate and analyze the macroeconomic effects of deleveraging. Because a lower loan-to-value (LTV) ceiling limits the size of household debt, the deleveraging effect caused by borrowers' re-optimization is alleviated as the LTV ceiling decreases. When the housing price is included as an additional operating target in an otherwise standard monetary policy (MP) rule, economy-wide welfare increases when the MP is proactive to demand shocks and inactive to supply shocks. These findings suggest that deleveraging risk can be attenuated by adopting a lower LTV ceiling and maneuvering MP asymmetrically depending on the source of a shock.
Subjects: 
collateral
deleveraging
emerging economy
household debt
loan-to-value ceiling
monetary policy rule
JEL: 
E31
E52
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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