The Effects of Borrower-Based Macroprudential Policy - An Empirical Application to Korea

The effects of mandatory loan-to-value (LTV) and debt-service-to-income (DSTI) ratios on real estate markets in the Korean economy are investigated using a sign identified Structural Vector Autoregressive (SVAR) model with Bayesian inference. Sign restrictions are drawn from a small open economy dynamic stochastic general equilibrium (DSGE) model with collateralizable housing. Results suggest that these borrower-based macroprudential policies (BB-MaPP) have been successful in curbing real estate cycles in the form of real household credit and real house prices. Monetary policy shocks, on the other hand, do not have a significant influence on real house prices. Housing demand shocks turn out to be the main driver of real estate cycles in Korea with BB-MaPP shocks coming in second. Overall, the historically low volatility in real house prices and real household credit growth since 2002 in Korea might at least be partially owed to the implementation of BB-MaPP measures