Measuring the effects of LTV and DTI limits : a heterogeneous panel VAR approach with sign restrictions

Estimating heterogeneous panel VAR models, this paper empirically investigates how effective macroprudential policy is in curbing mortgage loans and house prices. The sign restriction approach is used to identify two fundamental policy shocks - monetary policy and macroprudential policy shocks. This paper provides three important results. First, the macroprudential policy effectively reduces house prices as well as mortgage loans regardless of whether the policy binds on the households’ borrowing constraints. Second, macroprudential policy has some macroeconomic effects, which are similar but weaker than monetary policy. The macroprudential policy has more significant and larger impacts on output and inflation when the policy becomes binding. Finally, the heterogeneity of policy effects across economies is considerable, thus allowing heterogeneity is more appropriate for estimating policy effects