2014/08/01 by Caterina Mendicino, Mendicino, Caterina, María Teresa Punzi +1
Business, Management and Accounting · Economics, Econometrics and Finance · #Economic theories and models #Financial Literacy, Pension, Retirement Analysis #Housing Market and Economics
paper · doi:10.57938/d52c55b3-bf54-4df8-a082-3fac84af8a88
openalex publication_date 2014/08/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/27
This paper evaluates the monetary and macroprudential policies that mitigate the procyclicality arising from <br/>the interlinkages between current account deficits and financial vulnerabilities. We develop a two-country <br/>dynamic stochastic general equilibrium (DSGE) model with heterogeneous households and collateralised debt. The model predicts that external shocks are important in driving current account deficits that are coupled with run-ups in house prices and household debt. In this context, optimal policy features an interest-rate response to credit and a LTV ratio that countercyclically responds to house price dynamics. By allowing an interest-rate response to changes in financial variables, the monetary policy authority improves social welfare, because of the large welfare gains accrued to the savers. The additional use of a countercyclical LTV ratio that responds to house prices, increases the ability of borrowers to smooth consumption over the cycle and is Pareto improving. Domestic and foreign shocks account for a similar fraction of the welfare gains delivered by such a policy. (authors' abstract)