King's College London

The use of macroprudential policies aimed at preventing excessive household mortgage debt can mitigate costly effects of debt deleveraging that would otherwise amplify economic downturns. These benefits are likely to be especially important for small open economies operating under fixed exchange rates without independent monetary policy.

Macroprudential debt limits can also improve the resilience of banks by reducing risk in mortgage portfolios. However, these benefits will tend to be undone as capital requirements for banks using model-determined risk weights with fall. Such policies also come with costs as they potentially reduce aggregate consumption outside of crisis periods, and they constrain the borrowing capacity—and hence housing tenure choices—available to some borrowers.

Professor David Aikman identifies several channels through which these costs may manifest themselves, though little empirical evidence quantifies their overall impact. Using the "GDP-at-Risk" approach, the paper ends by outlining an approach that can be used to evaluate the macroeconomic costs and benefits jointly.

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