TY - JOUR AU - Richter, Björn AU - Schularick, Moritz AU - Shim, Ilhyock TI - The Costs of Macroprudential Policy JF - National Bureau of Economic Research Working Paper Series VL - No. 24989 PY - 2018 Y2 - September 2018 DO - 10.3386/w24989 UR - http://www.nber.org/papers/w24989 L1 - http://www.nber.org/papers/w24989.pdf N1 - Author contact info: Björn Richter Department of Business and Economics, Universitat Pompeu Fabra Carrer de Ramon Trias Fargas 25- 27 08005 Barcelona https://sites.google.com/view/bjoernrichter E-Mail: bjorn.richter@upf.edu Moritz Schularick University of Bonn Department of Economics Adenauerallee 24-42 53113 Bonn Germany E-Mail: moritz.schularick@uni-bonn.de Ilhyock Shim Bank for International Settlements 78F, Two IFC, 8 Finance Street, Central Hong Kong SAR China E-Mail: ilhyock.shim@bis.org M1 - published as Björn Richter, Moritz Schularick, Ilhyock Shim. "The Costs of Macroprudential Policy," in Jordi Galí and Kenneth West, organizers, "NBER International Seminar on Macroeconomics 2018" Journal of International Economics (Elsevier), volume 118 (2019) M3 - presented at "International Seminar on Macroeconomics", June 29-30, 2018 AB - Central banks increasingly rely on macroprudential measures to manage the financial cycle. However, the effects of such policies on the core objectives of monetary policy to stabilise output and inflation are largely unknown. In this paper, we quantify the effects of changes in maximum loan-to-value (LTV) ratios on output and inflation. We rely on a narrative identification approach based on detailed reading of policy-makers’ objectives when implementing the measures. We find that over a four year horizon, a 10 percentage point decrease in the maximum LTV ratio leads to a 1.1% reduction in output. As a rule of thumb, the impact of a 10 percentage point LTV tightening can be viewed as roughly comparable to that of a 25 basis point increase in the policy rate. However, the effects are imprecisely estimated and the effect is only present in emerging market economies. We also find that tightening LTV limits has larger economic effects than loosening them. At the same time, we show that changes in maximum LTV ratios have substantial effects on credit and house price growth. Using inverse propensity weights to rerandomise LTV actions, we show that these effects are likely causal. ER -