A1556
Title: Borrower-and lender-based macroprudential policies: How do they affect the transmission mechanism of fiscal policy
Authors: Lebogang Mateane - University of Cape Town (South Africa) [presenting]
Christian Proano - Otto-Friedrich-Universitaet Bamberg (Germany)
Abstract: The aim is to investigate how borrower and lender-based macroprudential policies affect the transmission mechanism of fiscal policy. A dynamic stochastic general equilibrium model is constructed with a fiscal and banking sector. It is found that upon impact, a government spending shock generates an increase in aggregate consumption; however, there is no permanent increase in aggregate consumption. This is within a setting where entrepreneurs are borrowers; they exhibit an increase in consumption upon impact, whereas patient households are savers and they exhibit a decrease in consumption. The findings are aligned with models that incorporate household heterogeneity. Specifically, non-Ricardian and Ricardian households in the class of two agent new Keynesian models. It is also found that if policy authorities increase the stringency of borrower-based macroprudential policy and, in response to a government spending shock, they stabilize pro-cyclical bank lending. Results are robust to the lender-based macroprudential policy. Particularly, to a higher degree of responsiveness of the time-varying loan-to-value ratio of entrepreneurs to the capital-to-debt exposure of banks. In an environment of technology shocks and with policy authorities increasing the stringency of borrower-based macroprudential policy, we find that they stabilize pro-cyclical bank lending.
