Calibrating Macroprudential Policies In Europe Amid Rising Housing Market Vulnerability
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Calibrating Macroprudential Policies in Europe Amid Rising Housing Market Vulnerability
Author | : Ms. Laura Valderrama |
Publisher | : International Monetary Fund |
Total Pages | : 46 |
Release | : 2023-03-24 |
Genre | : Business & Economics |
ISBN | : |
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Housing market developments are in the spotlight in Europe. Over-stretched valuations amid tightening financial conditions and a cost-of-living crisis have increased risks of a sustained downturn and exposed challenging trade-offs for macroprudential policy between ensuring financial system resilience and smoothing the macro-financial cycle. Against this backdrop, this paper provides detailed considerations regarding how to (re)set macroprudential policy tools in response to housing-related systemic risk in Europe, providing design solutions to avoid unintended consequences during a tightening phase, and navigating the trade-offs between managing the build-up of vulnerabilities and the macro-financial cycle in a downturn. It also proposes a novel framework to measure the effectiveness of tools and avoid overlaps by quantifying the risks addressed by different macroprudential instruments. Finally, it introduces a taxonomy allowing to assess a country’s macroprudential stance and whether adjustments to current policy settings are warranted—such as the relaxation of capital-based tools and possibly some borrower-based measures in the event of a more severe downturn.
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