Household savings constraints, uncertainty and macroprudential policy
| Published date | 01 May 2021 |
| Author | Conor O'Toole,Kieran McQuinn,Philip Economides |
| Date | 01 May 2021 |
| DOI | http://doi.org/10.1111/sjpe.12267 |
238
|
wileyonlinelibrary.com/journal/sjpeScott J Polit Econ. 2021;68:238–260.
© 2020 Scottis h Economic Societ y
1 | INTRODUCTION
The adoption of ma croprudential policy (MP P) measures across a number of juris dictions over the past 10 years
is an increasingly popular response to the credit-fuelled nature of the property bubbles, which had emerged in
the run up to 2007/2008 . As Clement (2010) highlights, t hough the term macroprude ntial policy had been used
publically since the 1980s, there was a sharp increase in the term's use following the immediate impact of the
global financial crisis. From 1991, limits on loan-to-value (LTV) and debt-to-income (DTI) ratios have been used
by authoritie s in Hong Kong, China, Korea, Si ngapore and other emer ging market economies as a cou nter-cyclical
credit tool (Wong e t al., 2011; Zhang & Zoli, 2016). The signifi cant increase in mor tgage credit which pre ceded the
international , financial crisis resul ted in the financial sys tems of a number of countries b eing especially vulne rable
to disruptions in g lobal financial markets e xperienced at that time. A s a result, regulatory au thorities in Hungary,
Accepted: 13 November 2020
DOI: 10 .1111/sjpe.1 2267
ORIGINAL ARTICLE
Household savings constraints, uncertainty and
macroprudential policy
Conor O'Toole1| Kieran McQuinn1| Philip Economides2
1Economic Analysis Division, Economic and
Social Resea rch Institute, Ire land
2Universit y of Oregon, Eugene, Or egon,
USA
Correspondence
Conor O'Toole, Eco nomic and Social
Research Insitute.
Email: conor.otoole@esri.ie
Abstract
We investigate the impact of macroprudential policy on
Irish households' perception of savings adequacy, with a
particular focus on households intending to purchase a
home. These measu res tighten loan-to-value ratios and ra ise
the entry cost for home purchase. We find that the meas-
ures have had a significant impact on savings constraints.
Indeed, constrained potential buyers, who are planning to
purchase, but not presently saving to buy a home, are the
group most affected as the macroprudential rules increase
the downpayment size required. Heterogeneous effects
across households indicate younger, private renting house-
holds, and those wi th relatively uncertain cash f lows.
KEYWORDS
savings, uncertainty, macroprudential policy
JEL CLASSIFI CATION
D14; G28
|
239
O'TOOLE ETaL.
Norway, Sweden, Fin land and Ireland have all ado pted these types of MPP me asures. These instr uments are spe-
cifically aim ed at curtailing the exce ss provision of credit and provid ing financial buffer s for both households and
credit instit utions to mitigate the impac ts of future downturns in h ousing markets.
While an increasing array of studies have examined the effectiveness of loan to value among other MPP
restrictions from a financial stability perspective (Cerutti et al., 2017; Claessens et al., 2013; IMF, 2011), few
have examined the i mplications of such measu res for household finan ce and in particular th e savings decisions of
households. However, as homeownership remains a strong preference among households in many economies, it is
likely that the int roduction, and poss ible subsequent variat ion in MPP requirement s, will impact the dete rminants
of households’ savings.
If LTV limits stre ngthen through the introd uction of MPP, the downpayment required by h ouseholds to pur-
chase a given home will immediately increase. For a given pool of savings, this policy adjustment effectively
lessens the bu ying power of households , leaving them in a more cons trained position. C eteris paribus, an inc rease
in the households' savings rate is required to maintain home purchase plans. Alternatively, households would
have to increase the length of time required to accumulate the deposit. In cases where households are unable
to increase the s avings rate, or must delay purc hase, these households a re expected to lower their pe rception of
savings adequ acy. As a consequence, a tightenin g of MPP could increase the share of hous eholds who consider
themselves to be constrained in their ability to save effectively for homeownership. This experience is likely
to be most strongly felt in the short run, given the countervailing long-run effects of MPP limiting demand for
houses, resul ting in the long-run slowdown in ho use price inflation (Johnson , 2019). Should house prices decline
sufficiently in the long run, overall downpayment requirements may not be as taxing for households intending
to purchase a home . However, given the persistent increa ses in house prices as a result of ma ny years of limited
supply of housin g completions in Irelan d, further time may b e required to eventually e xperience these ho use price
declines. In the meantime, this study focuses upon the short-run effects of MPP on household perceptions of
saving adequa cy.
These mechan isms in a sense provide a proxy fo r liquidity constraint s, that is households whi ch need to raise
the savings rate to complete a planned purchase due to tighter credit requirements. Previous research has fo-
cused on liquidi ty constraints for ho useholds (Carroll & Kim ball, 2001; Samwick, 20 03; Zeldes, 1989), noting that
when “liquidity constraint is added to the standard consumption problem, the resulting value function exhibits
increased pru dence around the level of wealth w here the constraint become s binding.” Therefore, the exte nt to
which househo lds experience liquidit y constraints can have a ma jor impact on their saving s decisions and in turn
on investment an d consumption. In general, howe ver, due to the paucit y of detailed information on ho useholds’
savings decisi ons, it is difficult to fin d empirical evidence of th ese features.
In this paper, we draw on a nove l data set of household sav ings which measures ho useholds’ perception s as to
whether their current savings behaviour is “optimal.” One challenge of studying savings behaviour among house-
holds is the notion that each individual responde nt may react different to a fixed level of savings. Factors such
as variations in f amily circumstances, pl anning decisions and expec tations of future economy circ umstances can
augment the sat isfaction part icular acts of savin g may enable. This specif ic data set, taken from the Economic and
Social Researc h Institute's Economic Sentime nt Monitor (ESM), allows us to define h ouseholds as facing saving s
constraints if they indicate they are not content with their current savings behaviour. The data also allow us to
disentangle whether or not households have a demand for housing and whether their savings behaviour is linked
to the need to acqui re a downpayment for the house pur chase. We couple this with a quasi-natur al experiment
through the unexpected introduction of MPP loan-to-value and loan-to-income measures in the Irish mor tgage
market to test how the increased downpayment requirement impacts households' savings constraints.
More specifically, using these unique, nationally representative survey data from Irish households, before
and after the int roduction of the new regulations, we exploit the variation across households in their exposure
to downpayment con straints to test (a) how MPP imp acts household per ceptions of saving adequac y and (b) how
uncertaint y and precautionar y behaviour shape the di stributional respon se to the policy across hou seholds.
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