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Do loan-to-value and debt-to-income limits work? : Evidence from Korea

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Frame of Image ws expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Abstract With another real estate boom-bust bringing woes to the world economy, a quest for a better policy toolkit to deal with these boom-busts has begun. Macroprudential measures could be in such a toolkit. Yet, we know very little about their impact. This paper takes a step to fill this gap by analyzing the Korean experience with these measures. We find that loan-to-value and debt-to-income limits are associated with a decline in house price appreciation and transaction activity. Furthermore, the limits alter expectations, which play a key role in bubble dynamics. JEL Classification Numbers: G21, G28, R20 Keywords: housing markets, mortgage, macroprudential regulation Author’s E-Mail Address:digan@imf.org; hkang@imf.org
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This paper was written while Kang was an economist at the Bank of Korea. Dohoon Pyon provided research assistance. We would like to thank Burcu Aydin, Stijn Claessens, Giovanni Dell’Ariccia, Enrica Detragiache, Tae Soo Kang, Subir Lall, Marcelo Pinheiro, and the participants at the IMF Research Macrofinancial Linkages Unit internal seminar and IMF Research Brown Bag seminar for useful comments. All remaining errors are our own.
Contents Page I. Introduction .....................................................


Full Text
Title Do loan-to-value and debt-to-income limits work?
Similar Titles
Sub Title

Evidence from Korea

Material Type Reports
Author(English)

Igan, Deniz; Kang, Heedon

Publisher

Washington, D.C.:International Monetary Fund

Date 2011-12
Series Title; No IMF Working Paper
Pages 35
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < Financial Policy
Holding International Monetary Fund

Abstract

With another real estate boom-bust bringing woes to the world economy, a quest for a better policy toolkit to deal with these boom-busts has begun. Macroprudential measures could be in such a toolkit. Yet, we know very little about their impact. This paper takes a step to fill this gap by analyzing the Korean experience with these measures. We find that loan-to-value and debt-to-income limits are associated with a decline in house price appreciation and transaction activity. Furthermore, the limits alter expectations, which play a key role in bubble dynamics.

User Note

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.