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State-Dependent Effects of Loan-to-Value Shocks

Author

Listed:
  • Vivek Sharma
Abstract
This paper presents a Two-Agent New Keynesian (TANK) model with collateral- constrained borrowers and a time-varying shock to loan-to-value (LTV) ratios. A temporary tightening in lending standards in this model leads to a sizable drop in macroeconomic aggregates and significant macroeconomic fluctuations. The analysis shows that effects of shocks to LTV ratios are highly non-linear and state-dependent in the sense that amplification of shocks depends crucially on steady-state LTV ratios. Shocks when LTV ratios are already high lead to effects which are substantially stronger than when the steady-state LTV ratios are comparatively lower. The results in this paper also show that permanent LTV shocks lead to permanent decline in housing prices – a 10 percentage point decline in steady-state LTV ratio from 0.95 results in more than 0.3% decline in housing prices. A novel finding in this paper is that a permanent tightening in lending standards leads to a permanent decline in wages. Additionally, other shocks such as TFP shocks, housing demand shocks and labor supply shocks also show clear state dependence and have highly persistent effects.

Suggested Citation

  • Vivek Sharma, 2023. "State-Dependent Effects of Loan-to-Value Shocks," CAMA Working Papers 2023-58, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2023-58
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2023-11/58_2023_sharma.pdf
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    More about this item

    Keywords

    Loan-to-Value (LTV) Shocks; Housing Price; Macroeconomic Fluctuations;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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