Estimating the effects of macroprudential policy shocks: A Qual VAR approach

- A Qual VAR is used to estimate a macroprudential tightening.
- Evidence for Korea.
- A macroprudential shock reduces credit growth and house prices.

This paper proposes a Qual VAR, i.e. a VAR augmented by qualitative variables, to estimate the effects of lowering maximum loan-to-value (LTV) ratios, a key macroprudential policy tool. We use Korea as a case study, where LTV ratios have been used frequently as a policy instrument. The Qual VAR has several advantages over competing methods. We conclude that a macroprudential tightening is effective in dampening credit growth and reducing the appreciation of house prices.