We estimate the macroeconomic effects of changes in loan-to-value limits using an approach that involves the cross-sectional loan-to-value distribution and does not require that a limit is actually in place. We show that the effects are asymmetric and non-linear as tighter limits constrain a larger fraction of borrowers. Symmetry is a good approximation when the limit is tight but not at other points. We find that an increase in heterogeneity can substantially increase the effects of a change in loan-to-value caps. We document that if one abstracts from borrower heterogeneity, one understates the size of the effects of LTV limits when the limit lies above the average LTV.
Keywords: Credit constraints, macroprudential policy, loan-to-value ratio.
JEL classifications: C32, E21, E32, E44.
Working paper no. 635