Macroprudential Policy and Housing

This work introduces residential land into a quantitative non-linear model of financial crises devised to study the design and effectiveness of optimal macroprudential policy. The model accounts for news shocks about future fundamentals and regime changes in global liquidity. Results show that the introduction of housing should lead to a strengthening of macroprudential policy, but only if the collateral constraint includes Loan-to-Value- class restrictions. Otherwise, housing has a small stabilizing effect akin to increasing the elasticity of intertemporal substitution of the representative agent. Furthermore, the implementation of macroprudential policy becomes less challenging when housing is properly considered