The effects of a macroprudential loosening: the importance of borrowers’ choices

Fergal McCann and Elena Durante
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Fergal McCann: Central Bank of Ireland
Elena Durante: Central Bank of Ireland

No 9/RT/22, Research Technical Papers from Central Bank of Ireland

Abstract: Macroprudential policy implementation in the mortgage market has generally involved a policy tightening, as policies have been introduced in settings where no such policies previously existed. In this paper we produce rare evidence on an episode of loosening under the macroprudential regime for mortgages. We exploit a reform of the Irish borrower-based measures in 2017 that increased LTV limits for a cohort of First Time Buyers. We show in response to the reform that borrowers bunched at the new maximum LTV of 90, increasing LTVs relative to the counterfactual. We highlight an adjustment mechanism that has important policy implications: we find no evidence that treated borrowers purchased more expensive properties; rather, we find that treated borrowers post lower downpayments after the reform, displaying a preference for cash retention once the opportunity arises. While economic intuition leads one to expect house price amplification after a policy-induced credit loosening, we show that borrowers’ choices to rebalance towards greater cash retention dampened this channel in the Irish case in 2017.

Keywords: Macroprudential policy; credit loosening; household finance (search for similar items in EconPapers)
JEL-codes: G21 G28 G51 (search for similar items in EconPapers)
Date: 2022-11
New Economics Papers: this item is included in nep-cba, nep-eec and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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