Download or read book Wealth Inequality and the Distributional Effects of Maximum Loan-to-value Ratio Policy written by William Gatt and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Macroprudential policy improves economic outcomes by reducing the likelihood and severity of financial crises. Yet it is pertinent to ask, are there unintended long run consequences to the introduction of a macroprudential policy regime, and are these consequences conditional on the a priori level of wealth inequality? This paper answers these questions by looking at the effect of a reduction in the maximum loan-to-value (LTV) ratio on homeownership rates, house prices and housing wealth inequality across two economies with different initial wealth dispersion. It uses a heterogeneous agent model in which households face uninsurable income risk and an endogenous borrowing limit in the form of a collateral constraint. This constraint is initially loose, allowing households to lever up against the collateral value of their housing. A reduction in the LTV limit tightens the borrowing constraint, and lowers homeownership as a greater share of households no longer afford the downpayment. The key finding of this paper is that initial conditions matter; the lower is wealth inequality ex-ante, the higher is the fall in house prices and the greater is the rise in the share of constrained homeowners and housing wealth inequality ex-post. The effects are also non-linear in the LTV ratio, with progressively stronger effects at lower LTV ratios, especially when inequality is comparatively low.