Macroprudential Policy Implementation in a Heterogeneous Monetary Union

I develop a two-country new Keynesian general equilibrium model with housing and collateral constraints to explore how macroprudential policies should be conducted in a heterogeneous monetary union. I consider four types of cross-country heterogeneity: asymmetric shocks, di¤erent loan-to-value ratios (LTV), different proportion of borrowers, and mortgage contract heterogeneity (…xed and variable rates). As a macroprudential tool, I propose a Taylor-type rule for the LTV which responds to deviations in output and house prices. This policy can be applied at a national or union level. Results show that asymmetries matter for the implementation of macroprudential policies, especially when the heterogeneity delivers di¤erences in economic and …nancial volatilities. A centralized macroprudential policy is preferred if there is an asymmetric shock, to balance out the cross-country di¤erent …nancial volatilities. For the mortgage contract heterogeneity, the economy is better o¤ with a decentralized policy that compensates the lack of effectiveness of monetary policy in the …xed-rate country. For the LTV asymmetry and the di¤erent proportion of borrowers, conducting the macroprudential policy at a national or union level produces similar welfare gains.