Risky Mortgages and Macroprudential Policy: A Calibrated DSGE Model for Lithuania

Following the financial crisis of 2009 there was an emergence macroprudential policy tools, as well a need to model macroeconomy and sector in coherent framework. This paper develops calibrates small open economy DSGE for Lithuania shed some light on interactions between banking sector, regulated by policy. The features housing market, endogenous credit risk la de Walque et al. (2010), whereby household can default mortgage repayments, what leads collateral seizure. Foreign-owned banks, that are subject risk-sensitive capital requirements, take into account not only rate but also cap loan value (LTV) ratio when making lending decisions. Using this mechanism, we show while more stringent LTV constraint reduced demand, it lead expansion supply via lower risk. Therefore, tightening requirement should result slight reduction lending, coupled with interest margins. article compares impact three namely, bank weights limit. We find broad-based such counter-cyclical buffer, less efficient leaning against cycle, because relatively large cost incurred firm sector.