The Effectiveness of Borrower-Based Macroprudential Measures: A Quantitative Analysis for Slovakia

WP/20/134The Effectiveness of Borrower-Based Macroprudential Measures: A Quantitative Analysis for Slovakia by Pavol Jurča, Ján Klacso, Eugen Tereanu, Marco Forletta, Marco Gross IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. © 2020 International Monetary Fund WP/20/134IMF Working Paper Monetary and Capital Markets Department The Effectiveness of Borrower-Based Macroprudential Measures: A Quantitative Analysis for Slovakia Prepared by Pavol Jurča, Ján Klacso, Eugen Tereanu, Marco Forletta, Marco Gross Authorized for distribution by Martin Čihák June 2020 Abstract We develop a semi-structural quantitative framework that combines micro and macroeconomic data to assess the effectiveness of combinations of borrower-based macroprudential measures in Slovakia. We expand on the integrated dynamic household balance sheet model of Gross and Población (2017) by introducing an endogenous loan granting feature, in turn to quantify the potential (ex-ante) impact of macroprudential measures on resilience parameters, compared with a counterfactual no-policy scenario, under adverse macroeconomic conditions. We conclude that (1) borrower-based measures can noticeably improve household and bank resilience to macroeconomic downturns, in particular when multiple measures are applied; (2) those measures tend to complement each other, as the impact of individual instruments is transmitted via different channels; and (3) the resilience benefits are more sizeable if the measures effectively limit the accumulation of risks before an economic downturn occurs, suggesting that an early, preemptive implementation of borrower-based measures is indeed warranted. JEL Classification Numbers: C33, E58, G18. Keywords: Borrower-based macroprudential policy, household micro data, macro-financial linkages. Authors’ email addresses: pavol.jurca@nbs.sk, jan.klacso@nbs.sk, eugen.tereanu@ecb.europa.eu, marco.forletta@ecb.europa.eu, mgross@imf.org *The authors gratefully acknowledge comments from participants at the 13th Financial Stability Seminar of the NationalBank of Slovakia, an IMF internal seminar organized by the Monetary and Capital Markets Department, and the jointECB/Banca d’Italia Research Workshop on Macroprudential Policies. In particular, the authors would like to thankAdrian Alter, Ahmad El Ashram, Lucyna Gornicka, Niamh Hallissey, Erlend Nier, Thordvardur Tjoervi Olafsson, andLaura Valderrama for their detailed comments and suggestions, and Marco Lo Duca and Marek Ličák for theirguidance and support.IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. Disclaimer: This document was prepared before COVID-19 became a global pandemic and resulted in unprecedented economic strains. It, therefore, does not reflect the implications of these developments and related policy priorities. We direct you to the IMF Covid-19 page that includes staff recommendations with regard to the COVID-19 global outbreak. ContentsPage Abstract ................................................................................................... 2 I. Introduction ............................................................................................. 4 II. Literature ............................................................................................... 5 III. Data and Model Methodology ..................................................................... 8 IV. Policy Scenario and Simulation Results ........................................................ 13 V. The Interaction of Borrower-Based and Capital-Based Measures ........................... 18 VI. Conclusions and Policy Implications ............................................................ 20 References ............................................................................................... 21 Annex 1: Literature ...................................................................................... 25 Annex 2 Additional Model Details .................................................................... 26 Annex 3: Reported versus Imputed Current House Price Values ................................ 37 4 I. INTRODUCTION Borrower-based measures have been activated and gradually tightened in Slovakia since late 2014 to address the