The real effects of loan-to-value limits: empirical evidence from Korea

This study adds to a recent and growing literature that assesses the effects of macroprudential policy. We compare the effects of monetary policy and loan-to-value ratio shocks for Korea, an inflation-targeting economy and an active user of loan-to-value limits. We identify shocks using sign restricted structural VARs and rely on a recent approach within this method to conduct structural inference. This study finds that both monetary policy and loan-to-value ratio shocks have effects during the period that our sign restrictions applies on different measures of credit, i.e., real bank credit, real total credit and real household credit, as well as on real output, real consumption and real investment. We find though that loan-to-value ratio shocks have negligible effects on the price level. Both shocks, however, have non-negligible effects on real house prices, evidence that go beyond the period of the imposed sign restrictions. These findings indicate that for the period covered by this study, limits on loan-to-value achieved their financial stability objectives in Korea in terms of limiting credit and house price appreciation under an inflation-targeting regime. Furthermore, it attained these objectives without posing any threat to its price stability objective. Overall, these findings suggest that limits on loan-to-value have important aggregate consequences despite it being a sectoral, targeted policy instrument.