Macroprudential Debt-to-Income Ratio and Monetary Policy Rules

Abstract

We consider a monetary DSGE model featuring a borrowing constraint such
that the amount of debt cannot be larger than a fraction – the debt-to-income
(DTI) limit – of borrowers’ labor income and the DTI limit is endogenous.
The coexistence of financial amplification mechanisms warranted by this model
provides a role for a specific macroprudential tool: a countercyclical DTI
limit. Conditional on the pre-crisis sample and in a more recent out-ofsample period, our ex-post normative analysis shows that when this policy
is implemented the cooperation between central bank and macroprudential
authority in pursuing the “two instruments for two goals” strategy delivers
an efficient performance in terms of macroeconomic stabilization, significantly
outperforming the central bank’s policy of “leaning against the wind”. This
implies that a central bank should only be focused on its standard objectives
(inflation and output stabilization) while financial stability be monitored by a
macroprudential authority.