LTV Ratio Regulations and House Prices in a Small Open Economy with Heterogeneous Households

Abstract

Macro-prudential regulations, such as loan-to-value (LTV) ratio ceiling, are implemented in several economies to stabilize the financial market and macro-economy, in addition to conventional

stabilization policies. This study constructs a small open economy model with heterogeneous households and house price fluctuations and examines the effects of LTV ratio regulation. Results of the model show that tightening the LTV ratio ceiling has considerable contractionary effects in a small open economy, but the effects are much smaller in a closed economy due to the general equilibrium effects of endogenous interest adjustment.