Aggregate Lending Standards and Inequality
Abstract
We study the effects of movements in the loan-to-value (LTV) ratio on inequality in a state-of-the-art New Keynesian model with heterogeneous households and lumpy housing. We find that a loosening of the LTV ratio substantially lowers inequality. We further show that through redistributing resources from households with low marginal propensities to consume (MPCs) to households with high MPCs, movements in the LTV ratio have a sizable impact on macroeconomic aggregates. A loosening of the LTV ratio by 1 pp increases aggregate consumption and output by 0.45% and 1.3%, respectively.
